Why Brokerage Firms Work Very Hard to Get Commissions

The fact is; brokerage firms are not staffed by disciples of Mother Teresa.  They exist for one purpose only: to make money for themselves. They do this by using your money, enticing you to let them “manage” it with the premise that their superior financial expertise will earn you more return than if you tried to manage it yourself.  In a nutshell, that’s the deal. As a client, you come in second—sometimes a distant second. If you make a few dollars along the way—well, that’s nice, and the word of mouth may bring in others. It is hard for any broker to focus on the altruistic when his manager is in 24/7 whip-flailing mode, striving to focus the troops on maximizing profit to the firm.  The name of the game is “commissions earned.” Moreover, if the brokers can collect those commissions in advance—the term here is up front, which (given the unspoken disadvantages to the investor) they definitely aren’t—so much the better.

Of course, this creates an inherent conflict of interest. For instance, let’s say the markets really look dismal—unemployment is running rampant, inflation is flaring, and terrorist attacks in our country are a distinct possibility. For the foreseeable future, there seems no feasible way to make a decent return on an investment.  In a logical world, what would you do with your money? If you are like many folks, you’d sit on the sidelines with your money held tight in your hand, waiting until the picture cleared.  Okay for you—after all, you have your money already. But the poor brokerage firm is in a pretty fix: unless they buy and sell constantly, there’s no revenue (“commissions”) coming in.  Can you imagine a financial company sitting on the sidelines until the storm passes in—say—six months or so?  No commissions for six months? That means no dividend checks for the shareholders of the brokerage. No dividend checks means that the president of the company is . . . well, toast. Fired!  But he won’t go out alone: branch managers (the ramrods who push the brokers to sell more, earn more) also are . . . replaced. But before they go, they fire the “underperforming” brokers. Chaos reigns: bearing torches and pitchforks, out-of-work brokers and financial advisors riot in the streets . . . nations fall . . . civilization collapses .

A horrific picture and one that no respectable broker could in good conscience allow (that is, if the aforementioned broker actually has a conscience). Hence, regardless of the financial prospects—and however much it may cost you, the investor—the brokerages must soldier on and collect those commissions.  Remember this the next time you see one of those TV commercials proclaiming how hard the brokerage houses work for you.