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Brokers Should Heed The Wake Up Call



Have you looked at your brokerage statement lately? What's most noticeable is what isn't there. Among the missing: a tally of total commissions paid and the rate of return for stocks and bonds in the account for the quarter or the year.

In fact, woefully inadequate statements are symptomatic of an industry that has apparently wanted to keep investors in the dark. Until recently, Wall Street's dirty little secret was a compensation system that sometimes puts brokers' interests in conflict with customers'. Among the most questionable practices: paying brokers extra commissions for selling firm-sponsored mutual funds and life insurance; pitching a "product of the month" to clients; and compensation schemes that provide tremendous incentives for "churning" (page 70).

Thankfully, some of the worst practices are being eliminated. The long-overdue changes result largely from a reform-minded crusade by Securities & Exchange Commission Chairman Arthur Levitt Jr., a former brokerage firm executive and head of the American Stock Exchange. At his urging, the biggest Wall Street brokerage firms have cooperated with a soon-to-be-released task force study that will recommend doing away with egregious practices.

The stakes for Wall Street's traditional, big-name brokers are high. If brokers lose much more public confidence, investment dollars will flow faster into the hands of mutual funds, independent investment advisers, and discount outfits such as Charles Schwab & Co. A failure by the industry to become more investor-friendly also would likely bring pressure from regulators. Levitt is not a proponent of new regulation, and the heavily controlled industry doesn't need more rules. But the SEC could require firms to disclose to customers details of commissions and performance. Come to think of it, investors should start demanding these changes right away.

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