Its just not fair… commissions are falling

Stockbrokers are complaining that it’s tough out there. Trading volumes are low and apparently, it’s difficult to make a living. Rather than focus on the behavioural signals that such apathy may signal a “floor” in the equities market, I would rather highlight the flaw in the broking pricing model.

What if the brokers were focused on finding investment ideas and giving their clients advice? They could then charge a fee for their advice, irrespective the amount of money that they have traditionally relied on moving around in order to generate commissions.

I recall moments when I would ask colleagues “how’s business”. Their response was often based on the amount of commission written that particular day. Their success or happiness was based on how many “tickets” they have written or more to the point, the amount of money that they turned over.

Furthermore, the attractiveness of an IPO or a product depended on the amount of commission being credited to them for selling it to their clients.

And should you manage to convince a client to buy IPO stock and then sell the stock on its first day of trade and use the proceeds to “switch” into a “better” idea, then brokers would have had a good day.

Just like other businesses that are suffering from lower revenues, perhaps they need to adapt to their environment. After all, broking firms do have their own analysts who could probably help them with their own business strategy.

Separately, these pricing models do not make stockbroking firms look like attractive investment propositions. A business that is reliant on money flows amongst a sea of commoditised research product is an example of being a price-taker.

Price is always questioned in the absence of value.



One Response to Its just not fair… commissions are falling

  1. Kingsley Barker says:

    very incisive and something I have often thought . well done for articulating a thesis oft seen to be a taboo in the broking community – – – – the dreaded commission and the concordant it “affords” brokers both personally and in the hierarchy of the organisation…

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