Mercifully, on May,1,1976, the rules finally changed and brokers were no longer required to charge the same commissions to all customers. The rules changed, but the rulers didn’t. Even with this momentous change in the rules of the game, the way it was played on the field didn’t change, at first. You still had the same coaches and the same players who had been doing it one way, very profitably, for a very long time; and if the rules changed, they thought that didn’t mean the way the game was played had to change too. Consequently, it was still high commissions for all; regardless of your trading volume or the services you needed (or didn't) from your BD.  It was a simple case of all the BDs sticking together.  

Stick together they did, except for a few inspired innovators like Charles Schwab, who actually had both the courage and the vision to offer reduced commissions to those who either didn’t want or didn’t need the extra services that the full-service BDs offered everyone (but really provided to only a few). Consumer advocates welcomed the freeing of the marketplace from its artificial price controls, but the doomsayers at the full-service BDs dubbed the date as "Mayday" --- the moniker by which it is still referred to by the industry.  

The consequences in life are not always good solely because they were motivated by the noblest intentions.  Accordingly, despite an apparently positive change (such as lowering commissions for the overwhelming majority of investors) Mayday hasn't necessarily been totally beneficial and lacking in any market detriment. Let me explain it this way. In my state the price of both milk and haircuts were once regulated by law too. This meant that a family paid the same price for a bottle of milk whether it was delivered to your door by the milkman or you got in your car and drove to the distant supermarket or just walked to the neighborhood grocery. I guess my age is showing because in those days I remember Mr. Dietrich, our milkman, rattling the bottles as he placed them on the kitchen stoop and soundlessly carried away the carefully washed empties. Naturally, most people chose to use the services of the milkman because they were getting the milk at the same price and the delivery, from their point of view, was “free.” 

It was the same deal with haircuts; all haircuts cost a buck, so it didn’t matter where you went or who cut your hair. I would return home complaining to my Mother that I got some pretty lousy haircuts and the barber wasn’t nearly so careful to keep the little snips of hair from falling beneath my collar and down the inside of my shirt. Then came the day I noticed a man tip the barber fifty cents. To say I was shocked would be an understatement. After a few haircut Saturdays stretched mercifully over several months I noticed that the tippers got their necks dusted with talcum and the gauze wrapping around their necks seemed snugger and they generally got better haircuts than cheapskates like me. 

Of course, the milkmen and the dairies and the barbers and the shop owners loved the price-control scheme. The route of the mailman was a rare commodity that could be bought and sold, like an FCC license. You might even say that for the milkman and the dairy this arrangement became something of a cash cow. They had a guaranteed profit and competitors who couldn’t enter the market to compete on price, freshness of the milk, or the quality of the haircut. Now that I’m older (only a little), I guess I know there were some political contributions that went to the legislators that perpetuated these schemes to the profit of a few; but to the detriment of the many. Even now states regulate the fees that river pilots are paid to help big ships navigate inland waters and ports. These pilots make over $300,000 a year and complain that’s not enough. Meanwhile they pass on their licenses to the next generation like Lords of old with the reminder to the next generation to keep the politicians happy with ducats from the family treasure.

When the dairy price-control rules changed in my state, due to protracted litigation sponsored by a supermarket chain in my community, shoppers quickly switched to the supermarket for their dairy products and I guess Mr. Dietrich played more golf. Without the protection of fair trade laws, milk trucks became as rare as Edsel convertibles. The story was the same with barbers. Without government controls all sorts of competition arose. You could get a haircut on a Monday, if you wanted. You could go to the mall late in the evening and “have your ears lowered,” as we used to say. You had choices and the barbers had competition.

But choices and competition do not come without consequences. The neighborhood lost the friendly service of Good Old Mr. Dietrich, and the barber, “Mr. Allergy,” we called him because he always left you sneezing your head off as mounds of hair gathered around his ankles. He was replaced by the cookie cutter cuties who stay at the new hair franchise just long enough to learn how short you like your hair cut and then they leave for greener, in my case grayer, pastures, where the pay or hours are marginally better. The milk hasn’t seemed to have improved either. My wife has taught me that there is sometimes milk still in the store’s refrigerator past the “sell date” and she has trained me to check each egg carefully to make sure I am not buying a half dozen cracked eggs with my dozen.

This brings me back to the full service BD. In this environment where they have to compete with discount brokers, they have chosen mainly to persist in the higher commissions of the past as they “whistle past the graveyard.” Incidentally, the difference between the full service broker and his discount competition is not trivial; it is large enough to make a big difference, a significant difference. Sadly, too, as we have seen in the recent past, the full-service broker serves not one or even two, but many masters. On the one hand, they are trying to sell you things they have bought in underwritings, or to sell you their quota of proprietary funds with enormous commissions attached; or they are recommending stocks their analysts have chosen in hopes of getting underwriting business from the Enrons and WorldComms of tomorrow. Even I was shocked to find analysts trading the good name associated with their personal reputation and that of their respective firm's reputation in exchange for a reciprocal recommendation from the other analyst at a competing firm to be made later.

I am reminded of the professional gambler who went into a small town’s only small casino and watched as the dealer dealt from the bottom, from his sleeve, and from his shoe to amass all the money the locals of that town had to wager. As a dejected gambler went to the bar for a final beer with his few remaining bills the gambler asked: “You know the dealer cheats, don’t you?”

“Yeah,” admitted the dejected loser, sipping the cold froth from the top of the glass.

“Why do you still play here then?” the gambler asked.

“Pardner,” the man said after a long sip, “it’s the only game in town.”

It’s not. Not for investors, not anymore.