Think discount brokerages deliver conflict-free financial advice? Think again, according to a news report.
According to a Wall Street Journal story on Wednesday, Schwab, Fidelity and TD Ameritrade incentivize their advisors to sell more expensive products to their clients.
Based on interviews with dozens of former employees of the three largest discount brokerages, the news investigation found that each firm encourages advisors to sell higher-cost products.
For example, representatives at Fidelity are paid 0.04 percent of client assets invested in most types of mutual funds and ETFs, but according to the report, they earn 0.10 percent on more costly investments in managed accounts and annuities.
Managed accounts are particularly lucrative for discount brokerages and their representatives, according to the report, costing investors fees of 0.2 percent to 1.7 percent of their assets annually. The former brokerage employees said that, in many cases, these clients could have been served with low-fee target date funds or robo-advisory services at a fraction of the cost.
Some TD Ameritrade advisors allegedly engaged in “sandbagging” near the end of a calendar quarter, where they delayed accepting or investing new client assets until the start of the next quarter to give them progress towards their sales targets, according to the story.
TD Ameritrade, Fidelity and Schwab also offer employees sales-based bonuses, awards and perks that may encourage advisors to promote higher-fee products, the Wall Street Journal reported. In 2016, Fidelity paid its representatives sales-based “Achiever” bonuses of up to $92,400 per year.
Schwab offers employees with excellent service and client satisfaction records access to its “Chairman’s Club,” an incentive that includes travel to a Hawaii or Florida resort. The Journal found that sales volume can be part of the Chairman’s Club qualification for advisors.
At all three firms, representatives receive incentives for referring clients to independent advisors, who then pay the discount brokerages up to 0.25 percent on client assets annually, the Journal reported.
Schwab, TD Ameritrade and Fidelity responded that the firms disclose possible conflicts created by their incentive structures, and claimed that internal controls help to identify bad actors and prevent unsuitable recommendations.