Recently I came across an article in the New York Times blogs section by Andrew Ross Sorkin that once again underscores the scary situation that many consumers of financial services face. As I have mentioned here on several occasions, it’s important to know the source of any “advice” you might receive.
This particular article includes comments from former brokers who have either retired or switched over to independent financial advisory firms. One comment in particular gave me the shudders:
The difficulty I had in the brokerage industry is that you don’t get paid for the delivery of financial advice absent the sale of a financial product. That is not to say the advice I rendered was not of professional quality, but in the end, I always had the sales pitch in the back of my mind.
This is not to construe that brokers cannot provide good advice – but rather, that even the brokers admit that the compensation system to which they adhere causes a bias that can be counter to the best interest of the client, the consumer of financial services.
In addition to the explicit issue of compensation systems, since the broker/salesman is not required to act as a fiduciary, certain under-the-table compensation systems can be in place with “preferred” mutual fund choices which offer revenue sharing with the brokerage above and beyond commissions. Disclosure of such arrangements is brand-new, only within the last year or so, and have come about in response to class action lawsuits against the likes of Edward Jones and Morgan Stanley Smith Barney.
At one stage it looked hopeful that upcoming legislation might have an impact on this situation – the first version of Senator Dodd’s financial overhaul bill required fiduciary duty by all brokers and advisors – but this bill has been scrapped and who knows what (or when) will be the final outcome. Stay tuned…
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I can learn from you, you can learn from me - please leave your comments and links!Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 25 years of experience in the industry. Read more from this author
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[...] Advisor or Salesman? [...]