The destructive effect of fees on investor accounts is widely known on Wall Street. The subject is never really discussed in great detail, though occasionally an entity like Morningstar produces a report that shows how fees kill returns. Even then the report must compete with the day’s events for news coverage. In the normal pace of things, a story on a study about fees is inevitably buried deep within a paper, or lost on a financial news website. Stockbrokers know all about fees. That’s a major contributor to their income. Fees sustain stockbrokers’ lifestyles. Fees are tentacles that wind and wrap through the stockbrokerage industry and all of Wall Street.
A former hedge fund salesman with extensive experience dealing with stockbrokers says the first question many ask about investment products is: “How much does this pay?”
Understanding the full extent of stockbroker compensation is more difficult than learning Sanskrit. Compensation information varies widely. A top stockbroker in Manhattan, New York, says his branch manager—a stockbroker who handles administrative duties at a stockbrokerage office—has a hard time understanding his compensation structure. Stockbroker payouts are based on money management, plus some sales commissions, plus different commission rates for different products. Some stockbrokers are paid monthly. Some are paid quarterly. All of them make money mostly the same way, though they get different percentage payouts.
Increasingly, most investors ...