Structured notes: His commissions vs. your returns!!

1. In the example below, the incentives the broker had to make a commission come out clearly. The client had no idea. It really shows you how incentives to make even a little bit more hurt the investing public.

   
   

2. The client was a married couple in their 20's. They had a long term outlook. They probably wouldn't need the money for 10 years. The broker actually wrote down a 20 year time horizon. The broker suggest a structured note with certain attributes. Most importantly to the broker was the note paid him a commission today of 1.5% and matured in 13 months. That means in 13 months, the broker would tell the client, the note matured and we (hopefully) made a little bit -I have another idea and lets to that for another 13 months. The broker would get paid another 1.5%. The client pays taxes on the gain, is actually happy that they made money and has no idea they could have deferred taxes for five years and had a much more favorable risk/return trade off.

   
   

3. The broker and the firm are required by Reg BI to compare the brokerage share class with the advisory share class. In the brokerage share class, the upside is 12%. In the advisory share class, the upside is 20%. The broker didn't let the client know there was an advisory share with better terms. Of course he didn't, the client would have chosen the advisory share class and the broker would have lost out on 1.5%.

   
   

4. (Reg BI rule Page 34): Recommendations of account types,  We are modifying Regulation Best Interest to expressly apply to account recommendations including, recommendations to open a particular securities account (such as brokerage or advisory) Expressly :- Explicit, stated clearly and in detail, leaving no room for confusion or doubt.

   
   

5. This Broker made $150 on the structured note up front as opposed to hopefully making $8.13 a month as long as the client is happy. ( This was a $10,000 purchase. In an advisory account, that can generate $100 annually. The monthly revenue is $8.13.) The advisory revenue only lasts as long as the client is happy while the $150 is paid to the broker immediately.

   
   

6. It gets worse! Once the broker has no incentive to push a product that pays him an upfront commission today and another one in 13 months, he will look around. Why should this couple buy a note that will incur a taxable gain in 13 months. At the same time this note was being pushed to the customer, the broker could have suggested:

   
   

   1. Note "A" will pay the customer 200% of the S&P over 5 years with a 20% downside buffer. The client could have 2x the S&P with twice the buffer and no taxes for Five years- no brainer, right- except that the broker won't get paid again for five years so the broker didn't offer it.

      
      

   2. Note “B” will pay the customer 320% of the S&P over 10 years. No brainer, right? But again, the broker won't get paid for 10 years, so he didn't show it.

   
   

7. Once the client is in an advisory account,  the broker will choose from a range of options with no incentive to sell A over B. The client will be in better products. The cost to the client is not just the extra commission, it is that their money will be in a better product in an advisory account.     

   
   

8. By forcing every customer to have the option of an advisory account, you see the power of the “key enhancement” of requiring a comparison to advisory.

   
   
   
   
   
   
   
   

This is the brokerage share class. It pays a 1.5% commission up to the broker and only has a 12% upside.

1. Below is the advisory share class. You can see the upside is 20%.

.