Posts Tagged ‘Fiduciary’
The brokerage industry never ceases to amaze in the many ways it puts its own interests ahead of those of its clients. Jason Zweig, at the WSJ’s MoneyBeat, discusses “happiness letters,” wherein brokerages try to cover-their-you-know-whats at year-end for potential misbehavior in an investor’s account.
The bottom line, should you receive a letter from your broker that begins by “thanking you for your business” and then mentioning a periodic review or some such, you should check your statements immediately. Zweig says it is likely that there has been churning or risk exposures that are perhaps inappropriate. Do not call the broker, but call the branch manager instead and ask to see the data that prompted the letter. Reading Zweig’s column makes for a chilling experience.
J.P. Morgan Chase won’t notify those customers who have been affected by its summer security breach — estimated to be two-thirds of U.S. households — that their personal information was exposed…When asked why, the spokesperson said, “That’s just what we’re doing.”
I did a lot of things at times with people on Wall Street. A lot of guys are shady, and they did shady things with me, and I don’t trust them.
Self-described former boss of the Colombo crime family, Michael Franzese, who spent 10 years in prison after he was convicted on federal racketeering charges, on CNBC
Overall, the Finra document is a reminder that the brokerage industry remains focused not on managing investments and delivering advice for clients, but on generating sales and trading by customers.
Just to point out, again, that there is a world of difference between a broker who works on commissions and other sales fees from providers and a fiduciary investment advisor who is paid a fee exclusively by their client for their services. Quote from Jason Zweig’s WSJ article “Whose Side Is Your Broker On?”, discussing a new report by the securities industry regulator.
I was assuming that political analysts were in the business of making accurate predictions, whereas they’re really in a different line of business altogether. They’re in the business of flattering the prejudices of their base audience and they’re in the business of entertaining their base audience and accuracy is a side constraint.
University of Pennsylvania professor, Philip Tetlock, in his 2006 book on the subject. Nate Silver in his The Signal and The Noise, extended Professor Tetlock’s thesis to other disciplines, notably to investment market experts whose judgement was found to be no more accurate than that of their political counterparts. I note that the political experts in this quote, much like most financial experts, owe their allegiances wholly to their employers and not to the public. Thus their core business is earning returns for their employer and not returns for the consumer. This is a fundamental distinction that can lead to all sorts of havoc. And is why we urge investors to seek out professionals who operate with a fiduciary responsibility towards their clients.
Anyone who has read my posts knows that I make a big deal out of the greatly under-appreciated differences between standards of care required of advisors and that of brokers. Registered Investment Advisors are held to a fiduciary standard and must act in the best interests of the client. Brokers are held to a suitability standard and a broker must reasonably judge a recommended investment to be appropriate. While this may seem a minor difference of language, in practice the consequences to an investor are significant.
Given the more stringent stipulations for investment fiduciaries, there is little question that the fiduciary standard better protects individual and institutional investors, than the suitability standard.
A consumer wishing to find out whether either party has a record of violating either of these standards can check the following sources: the SEC’s Advisor Search page for Registered Investment Advisors and FINRAs Broker Check for stock brokers & dealers. These sites will record whether any complaints or regulatory actions have been filed against the parties. But, hold on a minute, what’s this?
Seems that FINRA (a self-regulatory membership body of broker/dealers) is increasingly “wiping the slate clean” for brokers whose records contain a history of complaints and even legal actions. Said one lawyer “consumers are using Broker Check now like TripAdvisor… and no one wants to see these red flags on their records.” Isn’t that after all the point?
Given this latest disclosure of how the brokerage industry serves its own interests first, consumers are well advised to look for investment professionals who are Registered Investment Advisors, acting under a fiduciary standard Always ask for their ADV disclosure document and preferably look for those paid under a “fee-only” arrangement to minimize the potential for conflicts of interest.
Barry Ritholz asks himself “What is wrong with the financial services industry?” and comes up with this pretty good shortlist for an answer.
• Simplicity does not pay well: Investing should be relatively simple: Buy broad asset classes, hold them over long periods of time, rebalance periodically, get off the tracks when the locomotive is bearing down on you. The problem is its easier in theory than is reality to execute this.
• Confusion is not a bug, its a feature: Thus, the massive choice, the nonstop noise the confusing claims, all work to make this much more complex than it needs to be.
• Too much money attracts the wrong kinds of people: Let’s face it, the volume of cash that passes through the Financial Services Industry is enormous. Few who enters finance does so for altruistic reasons.
• Incentives are misaligned: As I’ve written previously, too many people are unwilling to get rich slowly. Hence, some of the wrong people work in finance, and some of the right people exercise bad judgment.
• Too many people have a hand in your pocket: The list of people nicking you as an investor is enormous. Insiders (CEO/CFO/Boards of Directors) transfer wealth from shareholders to themselves, with the blessing of corrupted Compensation Consultants. Active mutual funds charge way too much for sub par performance. 401(k)s are disastrous. NYSE and NASDAQ Exchanges have been paid to allow a HFT tax on every other investor. FASB and Accountants have done an awful job, allowing corporations to mislead investors with junk balance statements. The Media’s job is to sell advertising, not provide you with intelligent advice. The Regulators have been captured.
What’s the net impact of all this on your investments ?
• The Financialized US Economy: The above list reflects nearly half a century of the financialization of the broader US economy. Instead of serving industry, finance has trumped it. This led directly to the financial crisis and economic collapse of 2007-09.
“Where Are The Customer’s Yachts?” Fred Schwed famously asked in his classic book of the 1920s. Finance has always been a place where ambitious people could make a lot of money very quickly for themselves. As Ritholz writes there is a lot of money (customer’s money I should point out) floating around and often the wrong people get to be in charge of it.
There are client-centric solutions to the issues (called “agency problems” in economics), and they start with asset managers and advisors whose financial interests are closely aligned with those of their investors or clients. A good way to start educating yourself is to ask your financial advisor how they get paid.
Hire a financial planner. Or so says this Marketwatch article, citing a recent study by Morningstar. The core of their findings – a good financial planner adds significant value to a client’s wealth through “the extra income an investor can earn by making better financial decisions.”
The study cited asset allocation, tax efficiency, withdrawal strategies and liability-based investing (an institutional approach that is recently coming into its own in individual portfolios) as value-adding tools the typical planner has in his toolkit. All these add 1.8% per year in return over the average do-it-yourself approach.
So hooray for us. But I am waiting for a study that captures the additional wealth-enhancement in helping clients to make smarter financial decisions in all areas – financing, insurance, estate and tax planning. And what about the value of discouraging a client from investing in one of those “special opportunities” that are just too good to be true, to give one example of a benefit not captured in annual portfolio returns.
In a survey of 500 senior executives in the United States and the UK, 26 percent of respondents said they had observed or had firsthand knowledge of wrongdoing in the workplace, while 24 percent said they believed financial services professionals may need to engage in unethical or illegal conduct to be successful.
Matthew Yglesias asks “Do you have to be unethical to succeed” in the financial services? Certainly has seemed that way from the unceasing stream of revelations concerning financial services malfeasance. If anything, I would say the 26% cited above understates the reality as individuals are generally reluctant to admit, or to face the fact, that professional integrity has been compromised. Readers should expect the latest Barclay’s LIBOR scandal to get a lot larger before all is said and done.
The month’s AARP magazine has a very good article, Two Faces of Your Financial Planner, that explains the important differences between an advisor who works on sales commissions and someone who works under a fee arrangement with clients. The magazine also posts this excellent 10 Ways To Get The Best Money Advice