The Grid And The Penalty Box

I’ll flesh out what “the grid” is in a later post actually, but to give you a basic understanding now (so that you may further understand the linked article) here goes:

“The Grid” is more commonly referred to in the industry as “The Commission Grid”. It determines what the “payout” is for an advisor for the commissions he/she generates on products sold to clients. For example, let’s say that an advisor sells a DSC mutual fund to a client which generates a 5% commission. $500 (5% of $10,000) “hits the grid” using industry speak. Where it hits the grid determines the split of the commission between the advisor and his/her firm.

Generally the grid is a matrix with “ticket” sizes across one dimension and “annual gross commissions” across the other. The higher the ticket size (commission generated on one transaction) and the higher the total gross commissions (for the year), the higher the payout. The payout can normally range from about 30% to 60% for big brokerages, and 60% to 100% for independent shops. If the payout in our example was 40%, then the $500 gross commission hits the grid and the net commission to the advisor would be $200, with $300 going to the firm.

Anyways, the “penalty box” as described in the linked article is a very low payout range which may kick in when gross commissions fall to a certain level. It is designed as a motivator and also as a mechanism to weed out low producers.

In any case, thanks to reader to Marianne for pointing out the following article which she thought might be of interest to readers of this blog – Big Firm Conflict of Interest: The Penalty Box

Preet Banerjee
Preet Banerjee an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 4 comments
  • Mark Wolfinger


    I also linked to Barry’s article on the Penalty Box. It’s outrageous that people trying to do the right thing get punished.


  • Xenko

    Sounds like a stupid system.

    It would make much more sense to have incentives based on performance vs. a benchmark index… but then very few financial advisors would be employed.

    If financial advisors can’t beat the market on a consistent basis, doesn’t that mean they are just scam artists?

  • Preet

    @Xenko – Not necessarily. There are financial advisors out there who focus on financial planning and indexing portfolios. They know, and hopefully so do their clients, that returns will be the market less fees. Scam artists is a broad stroke – I think many advisors believe they can beat the market, or select managers who can.

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