Any advisor who has worked for a wirehouse is familiar with the “penalty box.” The penalty box refers to a painful double whammy: A precipitous drop in production that knocks an FA down the payout grid. It’s a fact of life at traditional broker/dealers: Big producers get to keep more of what they produce. In some cases, some b/ds favor fee-generating production over commissions, paying annuitized business at a higher grid level. It’s all about giving advisors incentives to produce and to do the right kind of producing.

With this in mind, readers of Registered Rep. might want to pop over to an interesting thread that has been developing since yesterday morning on the blog, The Big Picture. In that thread, at least one commentator is calling for Charlie Merrill to be hung in effigy for creating the modern-day, hard-charging, sales-oriented brokerage called Merrill Lynch.

The thread is all about b/ds’ conflicts of interest. The story told at The Big Picture yesterday is about the Merrill reps who do the right thing for their clients at the reps’ own expense; to be more specific, it’s the story of two “stock jockey” partners who turned bearish early last year, moving about 75 percent of their client assets into money market funds (AUMs were, combined, over $300 million, according to the story). As a result, their combined gross production dropped to “under $1 million” from over $3 million. Their branch manager informed them that, as a result, in 2009, their payout on the grid would drop to 30 percent from 43 percent. Ouch!

The point of the article: While the clients were well served (on average losing around 10 percent last year instead of, say, 40 percent, the posting avers), the FAs’ income suffered. The story implies—well, no, states—that this is a conflict of interest: What is good for the client is not always good for the FA. And faced with a similar trade off, how many FAs would have decided to keep the clients in securities instead of protecting them on MMF from which they do not get paid?

No doubt, registered reps are confronted with conflicts of interest with their clients everyday. No mistake about that. While most cannot pass up a chance to criticize mean, ole mega firms, such as Merrill, we would like to point out that the aforementioned registered reps (they apparently are not “investment advisor reps,” or IARs, of the Merrill RIA) could have actually done both: kept getting paid on the cash-equivalent assets while pulling clients out of equities. For example, Merrill offers BlackRock intermediate-term government bond funds that are cash like, says a source close to Merrill (for example, take BGPAX, which now yields 4 percent and returned more than 8 percent last year). There are undoubtedly other alternatives too. (Merrill declined to comment on this whole matter.)

Of course, the registered reps could also have also earned a CFP, a CFA or one of the other designations (including taking the Series 65) that would allow them to act as IARs, and to use the Merrill Consults program, which is for fee-based IARs. (Merrill even offers an in-house training program that allows Merrill reps to act as IARs.)

But, yes, conflicts of interest abound on a daily basis for registered reps. Of course, even the “fees-in-lieu of commission” programs were tossed out after being successfully challenged in court by the Financial Planning Association in 2007. (These were also known as fee-based brokerage accounts; a U.S. District Court of Appeals in D.C. ruled that the programs did run afoul of the Investment Advisers Act of 1940.) FINRA did not like fee-based brokerage accounts, stating that, in general, brokerages didn’t adequately supervise fee-based programs. It found that too many clients were in fee-based accounts and yet did not trade; in short, they were paying too much for no obvious advice. Lots of b/ds were dinged on that, including, Wednesday when FINRA announced that it fined Robert W. Baird for $500,000 in fines and forced the firm to disgorge $400,000 in fees, according to a (Milwakee) Journal Sentinal article. (Not to pick on Baird—many other firms, from Morgan Stanley to Wachovia Securities, got nailed for putting clients in fee-based accounts and yet not trading any securities for 8 or even more quarters in a row.)