Q: Would you explain the reason behind writing the book? Why do you focus on the brokerage industry?

A: The book originates from my own career and experience with Wall Street brokerage firms. I have been a broker and national trainer for some of the largest brokerage firms in the world for more than 20 years. So, I’ve spent a lot of time at the highest levels of the industry, and I didn’t like what I saw. Many brokers agree with that statement, which is evidenced by the increasing number of professionals leaving that industry. They love managing money but they want to do it in a way, where integrity and ethics are at the forefront.

The primary goal of the book is to educate investors and to provoke a national dialogue that, eventually, will have an impact on the business model of the brokerage industry. The necessary change is removing the commissions completely and entirely out of the financial management arena. Under the current business model, the compensation is based on generating commissions, and the result is an inherent conflict of interest between the advisor and client, and there is no way around it.

After all, the dialogue is about the most important bundle of money in their entire life. It could be the money for retirement from lifelong savings but, regardless of the source, it has to last with the investor’s family. The management of this money is of critical importance, but it is turned over to someone who generates a commission on it. That doesn’t make any sense.

Q: Could you explain the faults in the business model of the brokerage industry? Where exactly the inherent conflict of interest is?

A: The advisor, or the broker, is entrusted with picking the best investments on behalf of the client. That’s what the client expects and that’s the nature of the relationship. However, for the client’s portfolio, the broker selects among products that pay different commission rates, or different amount of dollars in his or her pocket. So, is it possible that the broker chooses a less appropriate investment, but one that pays him a greater commission? The answer is yes, and that’s the conflict of interest.

Beyond that, there is even greater pressure on the broker to produce higher and higher levels of commissions. The brokerage firms base the worth of the broker on the amount of commission revenue generated. every reward in the industry is based on the commissions - not only the broker’s income, but also the size and the location of their office, the quality of their support staff, the benefits like free trips

And the dollars deposited into the broker’s personal account based on the commissions are not some small incentive, but hundreds of thousands of dollars per year that the broker can receive. And yes, it is a big deal, and that’s what nurtures the conflict of interest. All the Wall Street firms, UBS, Smith Barney, Merrill Lynch, A.G. Edwards, are the same in that respect. They all offer spectacular bonuses, trips, and rewards for the money the broker makes for the firm, not for the client.

But I don’t condemn the brokers because they do the best they can within that business model. Most of them would agree that, more often than not, they hope that the best interest of the client is achieved, while the best interest of the broker is certainly achieved. The majority of Wall Street brokers are highly educated and qualified, and with good integrity. But they, too, have to make a living and take care of their families. Also, they get used to a certain way of life, which pressures them to generate more and more commissions.

The bottom line is that the motivation of the broker and the client are very different and completely misaligned, while there should be symmetry between those two motivations. The commissions should be eliminated from the industry. That has already been done in the field of the Registered Investment Advisors, or RIAs, but that’s probably the smallest segment of the financial advice industry. Thousands of brokers, who have been in the business for 20 or 30 years, and are now moving to the RIA side.

Q: How does the RIA model differ from that of the brokerage firms?

A: RIAs are typically people who have been in the business for a long time, but have left the Wall Street brokerage firms because they were disgusted with the business model. An RIA holds a much higher fiduciary responsibility and cannot receive a commission by law. I am one of those people, and we work based on fees only.

An RIA only gets paid a fee, or percentage, which is based on the value of the assets he manages,. Therefore, the advisor is motivated to grow the client’s money on the upside, or to preserve it during difficult markets. The only revenue of the professional advisor is the ongoing stream based on the size of the assets, and it doesn’t matter what investment products they use. So, there’s no financial conflict of interest.

If you’re a commission person, you have to sell to generate a commission. If you’re a RIA, you don’t sell anything, you’re just managing, and those are very different concepts. The only way the revenue goes up, is efficiently growing the assets under management by proper investment selection. Conversely, if you’re not very good at picking investments, the portfolios will go down, and your revenue will go down. So, the RIA business model is conflict-free when it comes to selecting investments, because the selection is based purely on how well the investments will perform in the clients’ account.

Q: Doesn’t that argument refer to the brokerage industry as well? If the broker isn’t making money for the client, the client will leave, and he will not receive the commissions any way. It makes a sense for the broker to make money for his clients, does it?

A: That’s a very good point, and it brings us back to the education of the client. Most of the clients that I interviewed had no idea that there exists another way to pay for investment advice. Let’s say a client with Merrill Lynch, for example, loses money and is very unhappy with the broker. What they would do is transfer the account to Smith Barney, or UBS, or any other Wall Street firm. In the end, they are replacing one broker with another.

Based on talking to clients around the country, I strongly believe that if the clients knew that they had a conflict-free alternative, they would opt for it. The major brokerage firms spend huge money on advertising each year, while the RIAs don’t advertise at all. They are much smaller firms, with smaller clienteles, where there is a boutique-style one-on-one relationship.

I am not saying that investors should not do business with brokerage firms. However, if they place their hard-earned savings with a commission-based model, they need to be well educated. They should know how the game is played; they should understand the industry motivation, and be more proactive in understanding how their money is managed. I am not advertising the RIA model and, actually, a very small part of the book is devoted to it. The idea of the book is to help investors make an educated choice.

Q: What is the size of the two industries in terms of number of brokers vs. RIAs?

A: My understanding is that there are 600,000 registered, commissioned brokers in the United States, of which about 120,000 are active. for comparison, the RIAs in the fee-only area, are 10,000 to 12,000, or 10% of the overall financial services industry. That means that the investor has a 90% chance of of bumping into someone who charges commissions. Moreover, it is the commission-based side that spends the money on advertising, so the investor doesn’t even know that the other 10% of the industry exists.