5 Things Brokerage Firms Need To Stop Saying

When I drive to my office in the mornings, I usually listen to talk radio. Normally, I tune out the advertisements in between segments. Today however, the tagline of a brokerage firm sponsoring the show caught my attention.

Advice In Your Best Interest

Familiarity with the particular brokerage firm got my shackles up. How could a firm that knowingly sells expensive, overpriced, underperforming products say they have your best interest in mind? The reality is, by design, they can't.

Brokerage firm falsehoods became the basis for this post, which over the rest of the drive to work evolved into all the verbal garbage that I know the financial industry spews upon the public. Here are 5 statements that the brokerage industry needs to stop using.

We Deliver Advice In Your Best Interest

Most financial advisors sell products. Products on their own are not bad. However, they aren't all created equal. The problem is the fact that advisors who sell products typically recommend higher cost products. High costs come in the form of underlying investment expenses or product expenses themselves. These high costs serve two functions; to enhance the total revenue generated and to compensate the selling rep with a commission. Higher costs rob you of return, which is one of the things you hire an advisor for in the first place! Products with high costs and baked in commissions directly conflict with the notion of advice in your best interest.

You'll Receive Specialized Advice

An investor can only receive custom advice if they engage in comprehensive financial planning. Investing outside of the context of your vision and goals is akin to investing in a vacuum. For example, without clarity regarding your goals, income, time horizon, current assets, and savings habits, how can you possibly come up with a valid investment strategy? Yet, most financial advisors don't want to bother with these considerations. It takes too much time away from gathering your assets and selling you shiny things.

We Are Fee-Only Fiduciaries

A recent Wall Street Journal analysis found that CFP certificants listed on the CFP Board's letsmakeaplan.org site have been incorrectly identifying themselves as "fee-only". Definition: fee-only planners do not accept commissions of any kind, and they typically work for Registered Investment Advisory (RIAs) firms that are legally required to act in a client's best interest. According to the analysis:

At Morgan Stanley, for instance, 181 of the 1,583 advisers listed on the CFP website called themselves “fee only,” as did 83 of the 748 advisers from UBS on the CFP website. That is 11% of the total number of CFPs listed from each firm. At J.P. Morgan, nine of the 100 listed CFPs said they are “fee only,” or 9%; at Merrill Lynch, 125 of 1,565 showed up as “fee only,” or 8%.

For the record, all of these brokerage firms sell products and charge commissions as a normal part of their day to day business. If an advisor works for one of these firms, they can't claim the fee-only advantage to sound more trustworthy while at the same time working for a company that regularly screws you with inferior products.

You Don't Pay Any Fees

I've heard this twice in the last year from prospects who were swindled by their local advisor who claimed their strategies would incur zero cost. Let me put this as bluntly as I possibly can.

FINANCIAL ADVISORS DO NOT WORK FOR FREE!

There is absolutely no free lunch in the financial industry. While it may be true an advisory fee or up-front sales charge isn't assessed in certain situations, I promise you the financial advisor is getting paid via hidden 12b-1 fees or commissions baked into the ongoing expense of the product.

The omission of critical decision-influencing information is just as misleading as an outright lie. The audacity to suggest there is no cost violates almost every principle related to trust and integrity.

Upside Growth Potential With No Downside Risk

This mythical product is the equivalent of a financial bigfoot. It doesn't exist. Earlier this year, one of my new(er) clients backed out from transferring her expensive, drastically underperforming annuity to my recommended low cost index-fund portfolio. She got a call from her agent who hadn't been in contact for years after we initiated the transfer. The agent convinced her to stick with her indexed annuity, and ultimately she did based on the claimed growth + zero risk concept and familiarity with what she'd owned for years.

There are thousands of cases each year where financial salespeople promote annuities and investment strategies that claim growth while protecting the investor during market declines. When you analyze the actual returns, what you typically find is the strategy failed to achieve any meaningful positive return. Or, the downside protection strategy didn't actually work the way they thought it was supposed to (as one fund manager recently tried to convince me it was while I was literally seeing a -6% YTD return on his fund in my Morningstar database).

We're Different

No they're not. Brokerage firms engage in all the same tactics; revenue sharing, commission based sales, illiquid investments, high fees, active trading, hidden costs buried in fine print, etc. Does anyone really believe that a brokerage firm like Raymond James is better than Edward Jones, or Wells Fargo, or LPL, or Ameriprise, or Morgan Stanley, or Merrill Lynch, or Transamerica? No one has any secret sauce. Period.

It's ironic that Wall Street firms almost all use some version of differentiating cliches, yet they're trying to separate themselves from the very same firms claiming the same type of differentiation! If you're a Wall Street brokerage firm, ok fine. Just don't try to pretend you're something you're not.

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While there's no stopping brokerage firms from bending the truth, you can protect yourself with one simple tactic. If you're not sure if your advisor is a true fee-only fiduciary, you need to find out. First ask them the following:

Are you a fee-only fiduciary 100% of the time with all your clients?

If the answer is anything but "absolutely, we don't work in any other capacity", you probably aren't receiving advice in your best interest. To make sure you're not missing anything, you should always verify the response by visiting FINRA's brokercheck site and searching for the brokerage firm. Once you identify the brokerage firm, you can use the link to view their Form ADV, which is required filing with the SEC or state division of securities. Read this document, which discloses what kinds of compensation the brokerage firm accepts. It will only take you 10 - 15 minutes, and it could end up saving you thousands.

Don't feel bad if you find out your advisor isn't actually on your side. Wall Street has 100 years of practice swindling consumers with lies, half truths, and outright omissions of fact. So don't be embarrassed! Just commit to taking action by working with a fee-only financial advisor. If you don't know one, check us out, or let us help you find one in your local community.

#fiduciary #evidencebasedinvesting