WALL STREET JOURNAL.
Advisers at Leading Discount Brokers Win Bonuses to Push
At Fidelity, Schwab
and TD Ameritrade, employees win extra pay and other incentives to
put clients in products that are more lucrative for them, and the
A TD Ameritrade location in San Francisco PHOTO:
DAVID PAUL MORRIS/BLOOMBERG NEWS
Jason Zweig and
Jan. 10, 2018 12:08 p.m. ET
Investors who seek advice
from discount brokerage firms might assume the counsel they get is
impartial, given how these firms have rejected the old Wall Street
model of working on commissions.
In fact, advisers at some of the biggest discount brokerage firms
make more money if they steer clients toward more-expensive products, according
to disclosures from the firms and people who used to work at them. That means
customers could end up with investment products and services that are costlier
than they need.
Jeff Weeks, a former Fidelity
branch manager in Austin, Texas PHOTO: ILANA PANICH-LINSMAN FOR THE WALL
“Clients hear the representative doesn’t work on commissions, and
they think that means a rep doesn’t work on incentives,” said Jeff Weeks, former
manager of a Fidelity Investments branch in Austin, Texas. “You’re omitting
certain facts that the client would probably appreciate understanding before you
launch into a sales pitch on why you think this product is better.”
The Wall Street Journal interviewed dozens of former employees of
the three largest discount brokers by assets, Fidelity, Charles Schwab Corp. and
TD Ameritrade Holding Corp.—all known for
bringing low-cost investing to the masses. Nearly all the former employees said
compensation practices encouraged workers to sell products that were more
lucrative both for the firm and for the employee—and cost customers more.
Fidelity representatives are paid 0.04% of the assets clients
invest in most types of mutual funds and exchange-traded funds. They earn more
than twice as much, 0.10%, on choices that typically generate higher annual fees
for Fidelity, such as managed accounts, annuities and referrals to independent
“If I was sitting in front of someone and there were 20 different
avenues we could choose from,” said former Fidelity financial consultant Sean
Gray, “and we could choose Fidelity’s managed accounts—that is what paid us
more—in my mind, that created a conflict. And that’s one of the reasons I left.”
Mr. Gray, who worked in a Fidelity branch in Atlanta from 2011 to 2016, now is
at a wealth-management firm in Georgia.
At Fidelity, sales incentives not only enhance pay directly but
also help representatives win “Achiever” bonuses that can be tens of thousands
of dollars a year. At Schwab, employees can win an award including a trip to
such destinations as Florida or Hawaii; for advisers, performance is measured
partly by sales volume in certain products.
Discount brokerage firms originated in the mid-1970s when
stock-trading commissions were deregulated. The higher payouts for brokers at
traditional firms led to a series of scandals in which investors were sold risky
assets that collapsed or underperformed, including tax shelters in the 1980s,
certain in-house mutual funds in the 1990s and private real-estate trusts in the
Many customers come to discount brokers to avoid such conflicts
and to keep the costs of investing low.
The discount brokers, while disclosing their employees’ pay
incentives on websites, said they don’t require the employees to talk about
these incentives with clients. Former employees said they almost never did.
The firms say they have extensive policies and procedures
designed to make sure their representatives, often called financial consultants,
act in clients’ interests and don’t unduly push any product or service.
“The internal controls we have in place flag someone who is
conducting their business” improperly, said Andrew Tappe, executive vice
president at Fidelity, who helps oversee its 197 branch offices. “We monitor
their activities closely, investigate immediately if we see any concerns, and
take prompt action.”
At Schwab, “We never want a financial consultant to feel they
have to sell one product over another from a compensation standpoint,” said Joe
Vietri, head of the firm’s branch network. “Our whole business is rooted in
trust and in always doing what’s in the best interest of the client.”
TD Ameritrade’s disclosures say it pays employees more for
selling some investments than others and “may have a conflict of interest when
it guides prospects toward these services.” Spokeswoman Becky Niiya said the
firm has had “policies, procedures and supervision in place for many years to
help our focus remain on delivering appropriate solutions for our clients.” She
said it recently introduced a new compensation plan to eliminate targets for
Mutual-funds giant Vanguard Group, which also has a discount
brokerage operation, said it doesn’t use sales incentives to pay employees.
The products and services for which employees of Fidelity, Schwab
and TD Ameritrade are best paid charge an annual fee—a percentage of assets—to
offer advice. The advice business is an increasingly important one for brokerage
firms, given steep declines in trading commissions in recent decades.
Discounters also find growing demand for advice from retiring baby boomers and
investors scarred by the 2008 meltdown.
Many former employees the Journal spoke with pointed to managed
accounts as products they were urged by supervisors to sell. These are baskets
of investments often combined with a financial plan and advice. They may cost
clients of discount firms anywhere from 0.20% to 1.7% of assets annually,
depending on factors including what the underlying investments are.
Former employees said some clients’ needs could be met with
lower-priced investments, such as “target-date” mutual funds costing 0.5% or
less a year or “robo” advisory services that often pair human advice with
algorithms and, for as little as 0.30%, adjust portfolios of low-cost funds for
“If you brought in a $1 million account and that person bought
stocks and bonds, that wasn’t an attractive client to Schwab,” said Bill
Parrott, formerly a Schwab employee who dealt with corporate executives. “The
incentive was to move them to managed accounts and advisory services.”
Molly Stanifer, a financial planner in North Carolina who worked
at several Fidelity branches from 2008 to 2013, said if a customer had at least
$50,000, “you had to lead off” by recommending a Fidelity managed account, “and
if you didn’t, you had to have a reason for it.”
Fidelity wouldn’t tolerate such a practice, said Mr. Tappe, the
executive VP. “We pride ourselves on doing the right thing for clients all the
time,” he said. “Implications from former employees, disgruntled or not, that we
don’t, we take really, really seriously.”
Without knowing the identities of the former employees, some who
spoke for discount brokers suggested that former employees who are critical of
the firms’ practices might have been underperformers. The firms also said it
would be counterproductive for employees to emphasize inappropriate products
part of their pay is based on retaining clients.
Mr. Tappe said about 20% of clients who come to a Fidelity branch
with more than the $50,000 minimum for a managed account eventually invest in
one, and that percentage has held steady in recent years.
He said Fidelity wants to give its financial consultants an
incentive to put in the extra time needed to understand and explain more-complex
products. “It is a very thorough, deliberate process to ensure there is a need
and it’s an appropriate fit,” he said. The idea that Fidelity aggressively
rewards the sale of managed accounts “runs counter to all the data we have and
how we run our business.”
All three firms pay incentives to representatives for referring
clients to independent investment advisers. These advisers charge clients an
annual percentage of their assets, and the discount brokerage firms receive up
to 0.25% annually on assets committed to the advisers.
Former TD Ameritrade financial
consultant Philip Snyder said, “We were incentivized...to refer clients to
advisers and to sell managed accounts.”
Photo: Greg Kahn/GRAIN for The
Wall Street Journal
Philip Snyder, president of his own investment-advisory firm in
Timonium, Md., worked at TD Ameritrade from 2007 through early 2016. “We were
incentivized to bring in assets, but more so to refer clients to advisers and to
sell managed accounts of mutual funds and ETFs,” he said. “So those were the two
options we would use.”
It can be hard to determine exactly which product or service is
best for an individual investor. Even former discount-broker employees who are
critical of these incentive structures say many customers may be better off
paying more for advice. Alternatives such as going it alone or using an
even-more-expensive traditional brokerage account could lead to
underperformance, they said.
Still, “there is no way I can be a true fiduciary” acting in a
client’s best interests when paid more to sell some choices than others, said
Mr. Gray, the former Fidelity employee. “If a target-date fund was suitable for
a client’s situation and a Fidelity managed account was also suitable, the fact
that a managed account paid more created a conflict of interest and made it
impossible to act in a true fiduciary capacity.”
Fidelity, Schwab and TD Ameritrade said their advisory businesses
comply with federal rules by acting in clients’ best interests. Lawyers
unaffiliated with them said the compensation practices are permissible under the
rules so long as the complexity of products is taken into account, potential
conflicts are disclosed and the firms pledge to put clients first.
Together with customer feedback, Fidelity employees’ variable
compensation counts toward annual “Achiever” bonuses. In 2016, according to an
internal compensation plan reviewed by the Journal, these bonuses could amount
to as much as $92,400 a year, jumping by thousands when incentive pay hit
Upping the bonus
A financial consultant who earned incentive pay of $129,579 to
$136,191 qualified for an Achiever bonus of $71,500. Earning a single dollar
more in underlying incentive pay could raise the Achiever bonus by $11,000, to
Several former Fidelity employees said financial consultants were
highly motivated to reach the next Achiever level and often favored products
that paid them more to get there faster.
Fidelity said: “Recognizing financial consultants who achieve
high client satisfaction and who help clients invest and grow their assets with
the right solutions is not under any definition a conflict of interest.”
Two recently retired Fidelity consultants introduced to the
Journal by the firm said they didn’t feel its incentive structure influenced
At Schwab, employees with exceptional service and client
satisfaction can qualify for the Chairman’s Club, winning a trip to a Hawaii or
Florida resort. For advisers, sales volume also can be part of the calculation.
The firm’s compensation practices could create “a financial incentive to
recommend [managed accounts] over other products and services,” said a 2016
Schwab disclosure of compensation practices.
TD Ameritrade discloses in a document on its website that sales
bonuses could give financial consultants “an incentive to make recommendations
for asset retention with a view to their compensation rather than the best
interest of clients.”
Associates are eligible for quarterly bonuses based on client
satisfaction and sales performance, said the firm’s spokeswoman, Ms. Niiya.
She said the new pay plan for financial consultants, introduced
in October, ties “a much greater share of their compensation” to the retention
A practice called “sandbagging” occurred at TD Ameritrade,
according to Mr. Snyder and other former employees of the firm. As the end of a
calendar quarter approached, financial consultants who had hit their targets for
new assets might delay accepting or investing fresh client money until the next
quarter. That got them off to a better start toward earning the next quarter’s
bonus, but meant leaving client money temporarily uninvested.
Ms. Niiya said TD Ameritrade isn’t aware of any customer
complaints indicating such conduct existed. She said the firm “reviews for this
behavior on an ongoing basis and would take corrective action if warranted.”
Jason Zweig at
email@example.com and Anne
Appeared in the January 11,
2018, print edition as 'Discount Brokers Push Pricier Services.'