Many investors are confused about the term investment advice and the different types of professionals who can provide it. Most investors do not understand the differences between investment adviser representatives or brokers calling themselves financial advisers; and the standard of care they think they are receiving from each.
Fee only investment advisers are legally obligated to act in the best interests of their client (i.e. act as a fiduciary). In contrast, brokers who call themselves financial advisers facilitate securities purchases and sales for their clients, usually for a commission, and are primarily governed by FINRA, which (and this is key) requires that investment recommendations they make to their clients be suitable for that particular client. In broker/client relationship, filled with all sorts of conflicts of interests, suitability is an extremely blurry standard at best.
A report by The RAND Institute for Civil Justice in 2008 found that 63% of investors believe registered representatives are required to act in the best interests of their client (they aren’t), and 70% believe that registered representatives must disclose any conflicts of interest (generally, they don’t)… [TD Ameritrade White Paper].
Due to the influence of special interest, Congress has not taken the initiative to clear up the confusion. Unfortunately for investors, confusing the two can have entirely unintended consequences. A clear line needs to be drawn between them so investors can make more informed decisions. There needs to be a clear distinction between who is a fiduciary and who is a salesperson. Anything less is irresponsible and unacceptable.
I have read your article and found it to be quite compelling. I agree that investors are currently unaware of the differences between brokers and investment adviser. To address this issue, I created a video called “Top 7 Things Your Wall Street Broker Doesn’t Want You To Know” which outlines the business models used by brokers working under the suitability standard. You can find the video here: http://www.youtube.com/watch?v=yz7NEVtJaUY. I hope you and your readers find the video helpful.
Best,
Alexander Efros, MBA, CPA
President / Founder
Athelon Wealth Management
http://athelonwealth.com
I have read your article and found it to be quite compelling. I agree that investors are currently unaware of the differences between brokers and investment advisers. To address this issue, I have created a video called “Top 7 Things Your Wall Street Broker Doesn’t Want You To Know” which outlines the business models used by brokers working under the suitability standard. You can find the video here: http://www.youtube.com/watch?v=yz7NEVtJaUY. I hope you and your readers find the video helpful.
Best,
Alexander Efros, MBA, CPA
President / Founder
Athelon Wealth Management
http://athelonwealth.com
As you know, the key ingredient to Wall Street’s business model is a woefully uninformed investor. Therefore, I applaud your effort to try and educate investors, but I think many investors are doomed due to their psychological biases.
For instance, financial literacy programs work for a minority of investors, but are a big waste of time for the rest. Wall Street has figured this out. Wall Street has lost huge sums of America’s retirement money and they will do it again. We never learn.
The problem is that we assume, erroneously, that investors can make rational decisions about investing. Most can’t. When it comes to investing, emotions always trump reason.
Wall Street doesn’t want investors who are quick on the uptake. The large financial institutions make their billions off of investors who are clueless.
I am guessing that your clients are in the minority of those investors that really see what’s going on.
But you must be stupefied when you see the many obvious ways that investors are being taken for a ride by these guys. The Wall Street institutions have perfected the art of separating investors from their money and turned it into a science.
Consider the many ways investors are being taken:
* Commission brokerage accounts laden with conflicts of interest
*Marketing and sales material crafted to appeal to naive investor biases
*Favorable SEC regulations won by Wall Street lobbyists (e.g. no fiduciary standard for brokers)
*Deceptive practices and investment products that are designed to skim fees
* Analysts at major investment banks promote stocks they know to be worthless, misleading the investors who rely on their advice
* Ratings agencies slap AAA ratings on debt they know to be dicey in order to appease the issuers — who happen to pay the fees of the agencies
* Mutual funds charge exorbitant fees that investors have to absorb
*The scale and complexity of the large financial institutions that blurs and distorts fiduciary responsibility making fiduciary duty tough to evaluate and plausible deniability an acceptable excuse when the shit hits the fan
*The ability of companies to use General Accepted Accounting Principles (GAAP) to hide losses and risk
*High frequency trading that increases the probability of front running and violates the banks obligation to get their customers best execution.
*Taxpayers responsible for billions, if not trillions in bailouts such as when we bailed out AIG only to learn later that the “Big Banks” knew AIG was going down and hedged or covered their positions leaving the small investor with worthless stock and the rest of us picking up the tab
Unfortunately nothing has changed since 2008. Wall Street is still running it’s con game and irrational investors are still walking right into this old, broken down casino and dropping their life savings on its roulette wheel.