Brokers, commonly called financial advisors, do not give advice! They are not in the business of giving advice-they are in the business of representing products and completing transactions. It’s a mixed up world when your financial advisor is your salesman.
To clarify, there is nothing wrong with selling products; many salesman have become successful by being honest when others are not and by giving honest opinions even when it means they don’t get the business.
However, would you see a cancer doctor who was only compensated by selling drugs by certain drug manufacturers? Would you hire a lawyer that was selling something?
So, why would we seek investment advice from those whose main source of revenue comes from selling mutual funds, annuities and stock trades? This happens all the time, under the guise of “Financial Advisor.”
Not all Brokers take advantage of clients; they usually just do not have the freedom not to.
A while back on the Front page of the Wall Street Journal was an article uncovering some disturbing practices by Goldman Sachs. Goldman Sachs has been sending out written research reports by their analysts to thousands of their clients, all the while holding weekly analyst conference calls with select clients called the “trading huddle.” During these conference calls, analysts give their true opinions about company stocks, the overall market and which stocks are likely to rise in value over the short run. Often these conference calls go against the written reports.
There is also an example given that after one day after the Janus Capital Group, Inc was given a neutral rating, research analysts called 50 of the firm’s selected clients to tell them the stock was likely to move higher. Unfortunately, news leaks out like this all the time, where unethical practices take advantage of clients to the gain of the company.
Other major brokerage houses do the same thing; however, they disclose that they may give advice to premium-paying clients that differs from the written reports.
When you watch interviews with CEOs and leading market strategists, they explain with great enthusiasm what they are doing for their clients-today. To be clear, chief strategists and research analysts are hired by large security firms to sell advice to clients in order to generate income through the trading of stocks and bonds.
Something that drove this home for me was watching a guest host-a chief strategist for some well-known securities firm one day, say in a very long winded speech that he agreed with others at the table that traders should raise their cash allocations, but should do so by taking a short position in their stocks equal to their long position in order to quickly reenter the market when they became more bullish. If you’re confused about this, know that I am too.
Close to Home
We use TD Ameritrade to hold all our client’s assets and also use them to execute transactions for us. TD Ameritrade is responsible for a large percentage of daily trading on the US stock exchanges. They have two main “sides” to the business: retail and institutional. Retail is a place for individuals to keep traditional and Roth IRAs or to have a regular trading account. Institutional is for professional money managers to keep assets there; this is called a custodial relationship. The institutional side has many features and functions retail investors do not have access to.
The main difference between the two sides is that the retail side of individuals is flooded with reports and features for the technical, frequently trading, active investor. On the institutional side, there is no such push or functionality for this kind of charting. Why? Because most professionals who do not receive compensation for trades do not invest clients’ assets in this way.
Most independent money management firms invest with a long term outlook. This is true of most pension consulting groups, endowments, bank trusts, mutual funds and financial journalists.
The reason for this difference is because TD Ameritrade receives a very reasonable $9.99 per trade.
What It Comes Down To
The problem with financial advice comes down to this fact: advice should be paid for separately from products and products should not pay the advice giver. And guess what, the overall cost of paying for independent advice will most certainly cost less than the expensive products being sold to you.
An industry word we throw around a lot called fiduciary is the difference here. Doctors, lawyers and even real estate agents have this same standard. Fiduciary means to act on someone else’s behalf; simply put, to act in a person’s best interest. Brokerage houses have a lot of power in lobbying to Washington and have thus far kept themselves out of being fiduciaries to clients.
What most independent, fee-only, Registered Investment Advisors see as the largest problem, is that the general public and many politicians see brokers and Registered Investment Advisors the same. Brokers, for years now, have put “Financial Advisor” on the business cards and in their titles. Titles like financial advisor and financial planner blur the lines between the two. All major brokerage houses run commercials that further blur the lines. Many people, now, are not even aware that there is anything else.
Many clients that come to us from Brokerage houses are confused when we plainly disclose the predetermined fees we bill them each quarter. This is because when you work with “financial advisors” or brokers, fees are hidden and reported as decrease in return. In this way, “financial advisors” can charge you fees no one would agree to if they knew. This is how not even the most honest, most genuine financial advisor could possibly serve the best interest of their clients.
You can easily judge the character of a man by how he treats those that can do nothing for him. James D. Miles
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