Following Your Broker to a New Firm?

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Posted: Feb 19, 2009 12:01 AM
Following Your Broker to a New Firm?

With Bear Stearns, Lehman Brothers and other firms gone, and Merrill Lynch acquired by Bank of America (BoA), there's a mad dash under way by many of the remaining big-name firms to scoop up the brokers who used to work at BS, LB and ML. Brokers deemed worthy are being offered cash bonuses of as much as twice their annual pay to change firms, according to Darin Manis, CEO of RJ & Makay, a recruiting firm.

Guess who pays?

Some of the hottest action is at Merrill Lynch. BoA is reportedly paying huge retention bonuses to Merrill brokers who generate $2 million or more from fees and commissions so the advisers won't quit. Meanwhile, Smith Barney, Morgan Stanley and UBS are offering Merrill brokers 200 percent or more of their pay to switch firms, according to Manis.

Think I'm exaggerating? A November 2008 survey conducted by Fidelity Investments and National Financial found that one in three of the nation's brokers have been offered a bonus to switch firms. Another 27 percent say they expected to be offered an incentive to switch within the next month.

Brokerage firms are willing to pay these huge signing bonuses because they expect their recruits to bring clients with them -- along with the revenue they generate. Indeed, the brokers surveyed said they expect 60 percent of their clients, on average, to follow them to their new firm.

When a sports team gives a large signing bonus to a star player, the team expects the guy to perform. Likewise, a brokerage firm expects a recruited broker to bring his old clients along and to generate new commissions from those clients -- which means selling a lot of new investment products to them. If your broker switches firms, you need to ask two questions: Why is the broker leaving, and what's in it for me?

Ideally, the new firm will offer services and pricing not currently available to you. But if the broker merely wants you to justify his fat signing bonus, watch out.

I'm not saying you shouldn't go with your broker -- you may have a terrific relationship with him or her -- but you need to consider the economics behind the move. Brokers rarely switch firms for no reason, and many do so only because of a massive financial incentive.

Unfortunately, that incentive can create a conflict of interest between the two of you. So make sure you evaluate your options before agreeing to make the switch with your broker. You might decide that it's time to leave both firms and start fresh elsewhere.

In other news, investors in the Reserve Fund, which gained notoriety in 2008 when it became the first consumer money market fund to "break the buck" and incur a fall in its share price (normally stable at one dollar), are facing a new indignity. Not only did investors lose money and have their accounts frozen, the fund has announced it will use investors' money to pay its legal fees if investors sue the company and its managers.

In other words, if investors stop suing, the Reserve Fund will pay out 98.5 cents per dollar invested, according to the fund's plan of liquidation. Otherwise, the fund says, its investors may end up receiving less money because the company plans to use investor funds to defend itself.

Yep, investors are discovering that suing the fund means they are actually suing themselves.

This astonishing development has many investors wondering how they can ever trust the retail mutual fund industry again.