Totally Independent Financial Advice

Last week I discussed how the wrong incentives can easily disrupt a financial advisor's moral compass. It's HERE if you missed it. A natural follow up is to discuss how it's best to receive your advice from a totally independent source. That's what this post is about.

Let's get something out of the way; many financial advisors who call themselves "independent" aren't actually independent. Brokerage firms stole that word from the truly independent advisor community, just like they stole the phrase financial advisor when they should really be calling themselves financial salespeople. I digress...

Ok, here we go. Get ready for it, I'm about to name names.

Cetera Financial Group Edward Jones

LPL Financial Cambridge Investment Research

Commonwealth Financial Network Wells Fargo Advisors

Raymond James Deutsche Asset & Wealth Management

Lincoln Financial Network Northwestern Mutual

AXA Advisors Transamerica Financial Advisors

Voya Financial Partners (ING) Securities America

Waddell & Reed Financial Advisors Ameriprise Financial

I could keep going, but that's enough.

All of these firms brand themselves as independent. You want an independent financial advisor, right? Well, let's take a closer look at what they say versus how they behave.

How would you feel if your Independent financial advisor's employer received additional dollars from mutual fund companies to promote and sell their products? What would you say if you learned brokerage firms promoted pre-selected mutual fund companies in exchange for "due diligence, marketing support, and training"?

Raymond James takes it pretty far:

An exhaustingly long list (it's actually 144, my OCD compelled me to count) of their "Preferred" and normal "Partners" can be found on their WEBSITE. Seriously, you can't make this stuff up!

This Pay To Play arrangement is called Revenue Sharing, and it's ultra lucrative for brokerages. The rub is when clients who work with financial advisors affiliated with these companies fill your portfolio with mutual funds who've paid for preferred promotion.

My old firm, Ameriprise Financial, heavily restricted the number of mutual fund companies they allowed on their most popular investment platform - Strategic Portfolio Services. Only the fund companies who coughed up enough dough were allowed in the door. I can only assume they still practice this, but I could be wrong. I don't keep tabs on anything they do anymore.

It doesn't stop with mutual funds. Advisors commonly sell insurance, annuity, and "alternative" investments with similar conflicts of interest. I can think back to my brokerage days selling life insurance products. I think I remember four life insurance companies I was allowed to sell, one of which was RiverSource - Ameriprise's proprietary insurance brand. I got paid 2x as much for selling the proprietary stuff (go figure). In addition, only the proprietary brand qualified me for sales competitions, company awards, and paid trips. I didn't sell much insurance my last year there...

Equally offensive revenue sharing products include the very common Direct-Participation Program (DPPs) investments and Non-Traded REITs. Unfortunately it's very, very difficult to get out of these investments once you sign on the line.

Not offended yet? Let's put some numbers to all this.

LPL Financial (self proclaimed kind of independence) receives an extra 0.60% per year from DPPs on top of an extra 1.5% at the time of sale. On mutual funds, they get an extra 0.15% per year with a nice 0.35% pop up front*.

I looked up the amount of money LPL manages - $126,929,199,208 according to their most recent SEC disclosure filing. Giving LPL affiliated advisors the benefit of the doubt and assuming half of the them sell mutual funds tied in with revenue sharing arrangements, that's an extra $95 million in extra mutual fund revenue piling in LPL's door without actually selling one dollar's worth of a new mutual fund. I actually rounded that last number down...

The blatent conflict here is investors receive insurance, annuity, and investment product recommendations that can be extremely biased. Mutual fund companies that participate in revenue sharing programs need to raise money to get on brokerage platforms. They raise this money by charging higher fund expenses - expenses that investors ultimately pay for. Adding insult to injury, additional investment cost makes it harder for the fund to deliver benchmark beating performance. When the investor owns a conventional mutual fund with above average cost, they basically lock in a guarantee their fund will underperform over time.

See? That's a lot of underperformance... The only real solution is to buy the benchmark itself with a passively managed Index Fund.

I hope this post makes you question the type of company and financial advisor you do business with. If you didn't at least pause, well, I tried... And this is you.

My company doesn't engage in any type of revenue sharing. When we say we're independent, we can actually back that up. Further, we'll never recommend any specific brand of insurance or annuity product. What we will do is provide a list of potential companies to do business with, giving you our vetted opinion based on due diligence. Ultimately the choice is yours.

If you would like me to provide an analysis of your current investment, insurance, or annuity products please start a conversation with me by using the Shoot Us A Message contact form at the very bottom of this page. I'd be happy to share how you can lower your costs (which almost always increases expected return), as well as align your financial strategies with your big picture goals and values.

For additional reading about which side of table your financial advisor sits on, click HERE.

* Broker-Dealers Derive Big Income From Revenue-Sharing Deals, FA-Mag.com, Jamieson, 5/11/2015.

** Source: SPIVA® U.S. Scorecard (Mid Year 2013).