SEC Criticizes Broker Compensation Practices

Up front cash payouts as high as 70% of a broker's previous year's income, when that broker switches firms. Levitt says that this entices brokes to recommend investments not in the investors' best interests.

Higher percentage (payout grid) commissions to brokers as they sell more. As an example, brokers at Smith Barney earn 37.5% of the commisison charged to a customer when the broker generates at least $225,000 in total commissions. But larger "producers" can earn as much as 42.5% in commissions. Levitt says that this kind of incentive can create "strong pressure not only to sell, but to sell anything".

Higher commissions to brokers selling variable annuities or mutual funds, compared to stocks. Again, using Smith Barney as an example, brokers get paid 41% in commission when they sell mutual funds, and 42% when they sell annuities. But for stocks, they receive only 37.5%.