The Neglected Investor is all about Financial Literacy. Broker compensation is an important topic that all investors should fully understand. After all, you need to know the financial incentives behind any recommendations your Broker may suggest. SEC Chairwoman Mary Schapiro has recently sent a letter to the Brokerage community reminding them to maintain recruitment and compensation programs that are consistent with avoiding investor abuses.
While some Brokers make recommendations on a genuinely “needs based” analysis, many others may have financial incentives to steer you toward one investment vehicle over others (Read more about Broker/Advisor compensation schemes). Even when a Broker’s compensation does not favor recommending one investment over another, many Brokers can achieve a higher payout based on their overall production. Such a scenario could lead to “churning”, a practice of enticing an existing investor to sell an existing investment with the intent of using the proceeds to purchase a new investment. While this may be a perfectly legitimate transaction, there is the potential for abuse. Each sell & buy will typically involve a cost to the investor and a new commission for the Broker. The bottom line is that you should fully understand why a particular recommendation is being made. Keep reading The Neglected Investor to increase your Financial Literacy and become better equipped to interact with financial professionals.