Merrill Sets New Ethic by Reining In Novice Brokers

If you’ve ever gotten the fast hard sell from a young stockbroker, you know the feeling: Whether or not you buy what the broker is touting, you’re often left feeling abused. And if you buy and the investment bombs, you may vow never to trust another broker.

This week, Merrill Lynch & Co. announced a plan to combat what has become an epidemic of hard sell by the industry’s freshman brokers. Merrill will keep all of its new brokers in training--and on salary--for two years, rather than the current 20 weeks.

The goal is to remove the pressure that young brokers often feel to make sales, and thus generate commissions, to stay afloat financially while building a client base.

Merrill’s move could have repercussions beyond its own business. Other firms prefer not to admit it, but Merrill often sets standards for the industry. And there have been few other brokerage issues in recent years that have become as serious as young brokers’ desperate grab for commissions.


Much of what brokerages have done in recent years has actually made life tougher for young brokers rather than easier, encouraging them to sell with reckless abandon. As business overall has slumped, many firms have cut the percentage of commissions that new brokers receive to about 30% from about 34% in the mid-1980s.

Although older brokers who are bigger producers have seen their commission payouts hold or in some cases rise--at some firms, such as Prudential-Bache, top producers get 45% of the commissions they generate--the cuts on the low end dragged the average broker percentage take down to 36.7% last year from 39.8% in 1986.

That has created a vicious circle. New brokers earn less per sale, so they must sell more. The pressure thus mounts to spend less time with each potential customer, going instead for volume. But by ignoring the brokerage business’ cardinal rule--Know Your Customer--many young brokers have put clients’ money in disastrous investments. The situation has been worsened by the stock market’s slump and the collapse of junk bonds since mid-1989.

“I’ve seen young brokers get into some very bad habits over the last four to five years,” says Laurence Hoffmann, a 47-year-old broker for Prudential-Bache Securities in Rancho Cucamonga.

One extreme problem has been the tendency for young brokers to rely on one or two hot products, Hoffmann and other older brokers say. Many new brokers, for example, found it easy to sell junk bonds in the late 1980s. So that’s all they learned to sell, with little regard to the bonds’ suitability for all investors. When the junk crash came, those brokers were left with horrified customers--most of whom quickly became ex-customers, and some of whom sued.

Merrill Lynch believes that by extending its training period to a full two years and by paying new brokers a salary for that period rather than forcing them to live off commissions, it will encourage “the highest degree of integrity” among its brokers. The benefit for the firm, of course, is that better-trained brokers should result in happier customers over the long run.

Shouldn’t other firms follow Merrill? Shearson Lehman says it already keeps new brokers on salary for their first 16 months. But at most firms, brokers must begin producing within a few months of being hired. Moreover, though it may shock the average investor, most brokerages don’t even have formal training programs. Indeed, firms such as Merrill, Shearson and Dean Witter Reynolds have long been training grounds for virtually the entire industry: Brokers often start at those firms, then jump to smaller brokerages without more training.

Many brokerage executives argue that paying a salary to new recruits isn’t the solution to halting dangerous sales techniques. At Dean Witter Reynolds in New York, spokesman Jim Flynn says the firm has no plans to change its current training program, which places most brokers on commission after six months to one year.


The key to ethics control, Flynn says, is to have a strong manager at each branch office--someone who keeps track of what and how the brokers are selling. “Especially right now, the manager really has to manage,” Flynn says. “You have to watch those (sales) tickets.”

To their credit, several major brokerages also say they will beef up retraining of older brokers and branch managers in 1991. Merrill is creating a new “advanced training” program for experienced brokers and says it will change the compensation of its branch managers to reward them for how well their brokers meet clients’ needs. And Merrill will give all brokers a certificate worth $100,000 in 10 years if they stay with the firm, meet performance criteria and avoid client complaints of poor service or improper investments.

Shearson plans to put 2,000 of its 9,000 brokers through a new training program that will focus on quality of service rather than new products, a spokeswoman says. The firm is also discussing a new branch manager training program that would emphasize service.

From the individual investor’s point of view, many of these steps are overdue. It also doesn’t help much that most brokerages have cut back severely on the number of broker-trainees they’ll take on in 1991. The new programs would have done far more good had they been in place during the salad days of the 1980s.


Still, this is a start. If Wall Street is to restore its credibility with individual investors, it must begin at the broker level. Know Your Customer must be reinstated as the guiding rule for securities salespeople, and those brokers who won’t take the time to follow that rule should find something else to do for a living.


Stock brokers’ average commission generation has shrunk since the 1987 market crash--and so has the share of commissions the brokers keep.

Avg. broker Avg. broker Avg. brokers’ Year commissions earnings commission share 1980 $146,245 $55,654 38.1% 1981 $134,595 $56,121 41.7% 1982 $164,095 $62,788 38.3% 1983 $212,477 $82,926 39.0% 1984 $169,969 $64,163 37.7% 1985 $206,000 $79,575 38.6% 1986 $243,845 $97,100 39.8% 1987 $246,466 $93,959 38.1% 1988 $189,617 $71,309 37.6% 1989 $214,691 $78,711 36.7%


Source: Securities Industry Assn.