Your "Independent" Financial Advisor Isn't Independent

When I was working at my previous brokerage firm, I loved referring to my company as an independent firm. This is what I was coached to say, and it sounded a lot more palatable than "you can trust doing business at our big Wall Street firm".

However, there was almost nothing independent about it. Low cost, tax efficient mutual funds were denied access on my investment trading platform, I had extremely limited options to sell anything other than expensive proprietary insurance, and I couldn't use any marketing materials except those created or pre-approved by the company.

I was one of a couple thousand sheep mindlessly peddling the company's BS.

After the follies of many a big name firm in 2008 during the Great Recession, if became chic for investors to distance themselves from brokerage firms caught up in the news and affiliate with independent financial advisors instead. However, a closer look at these independent shops doesn't add up to a better client experience.

So-called independent firms maximize profitability over client best interests just like the big boys. I would know. I am a reformed financial salesperson that spent five years working for one. Hustling investors has been a staple in the independent arsenal for years as evidenced by these lawsuits.

In 2017, Wells Fargo Advisors settled for $35 million to make a race discrimination suit go away.

In 2009, Ameriprise settled for $17.5 million for undisclosed compensation in return to selling non-traded real estate investment trusts (REITs).

In 2016, Raymond James was fined $17 million for anti money laundering deficiencies, which came just a few weeks after being caught up in a $350 million lawsuit involving a fraudulent real estate scheme.

In 2013, Commonwealth Financial Network agreed to pay back $2.4 million in restitution and fines for inappropriately selling non traded REITs.

In 2015, Northwestern Mutual paid $84 million to settle a class action lawsuit after the company illegally reduced annuity payouts on policies sold to clients.

And if that wasn't enough, the darling of the independent advisory industry, LPL Financial, was just hit this week with a $26 million lawsuit for failing to supervise reps who have been selling unregistered investments for OVER A DECADE!

I doubt I need to convince you that Wall Street doesn't have your best interest in mind, but it's critical to understand that all these holier than thou "independent" firms that tout sitting on the same side of the table as you is total crap.

Here are some simple rules for firms who want to claim they're independent:

An independent advisory firm is one that isn't tied to a parent umbrella firm in any way.

An independent advisory firm has the freedom to choose which custodian it uses to invest client money.

An independent advisory firm shouldn't be forced or coerced into selling proprietary products (they probably shouldn't be selling products at all, but that's a whole different blog post).

Last, and independent advisory firm should have education & processes in place to ensure its advisors operate in the best interest of clients.

The next time you run into a financial advisor who claims to be independent, most likely they are anything but. Words matter.

You are probably getting duped when someone name drops the "independent" description. You were warned, and you heard it here first.