Can Question Of The Month – MARCH , 2009

Who Can -Should You Trust?

Would you agree that 2008 was probably the worst year in many for most investors.  Why?  If something could go wrong, it did.  And it was easy to see who was to blame.  Newspapers, TV radio, the web all told us all about Wall Street. 

There is not much that you and I can do to fix – change the outright greed, corruption and incompetence and negligence that we heard about almost on a daily basis.  But, no one was forcing us to put our investments at the mercy of Wall Street.

Jeff Merriman-Cohen (FundAdvice.com) tells us “Imagine how different 2008 might have been if Americans had relied exclusively on competent advice from people who were free from conflicts of interest. No banks and mortgage brokers encouraging people to borrow money they couldn’t possibly afford to pay back. No chief executive officers convincing employees, shareholders, customers and stock analysts that things were rosy when in fact, they were awful. No brokers frantically trying to unload securities they would not dream of owning themselves.”

Merriman-Cohen adds “Millions of Americans would be better off today if they had realized something that everybody on Wall Street knows: Big Wall Street institutions are neither designed nor legally required to put their customers’ interests ahead of their own.”

So, who should you trust?   That is a great question.  A few years ago, only about 25,000 called themselves financial planners.  Today, that number is more than 650,000, 

Lynn O’Shaughnessy, financial columnists (San Diego Union-Tribune), is concerned that a good number of stock brokers and brokerage houses don’t like to talk about --- who is a financial adviser.  Lynn pointed out that back in early 2006, “Smith Barney, the brokerage giant, announced that it would start calling its stockbrokers ‘financial advisers.’  Most Smith Barney clients, if they heard this pronouncement, probably would have greeted it with some variation of ‘duh.’ These investors already assume that the brokers, who handle their accounts, are advisers.” 

Peggy Cabaniss, chairwoman of the Association of Personal Financial Advisors, says that the term ‘financial adviser’ should be reserved for professionals who give objective financial advice and who always put the interest of their clients first.  “It should not be co-opted by salespeople who’s only loyalty, both financial and legally, is to their employer.”

Most of us don’t really know the difference .  And, as Lynn points out, that is the problem.  “The brokerage industry has worked hard to erase the distinctions between brokers and investment advisers. And Smith Barney isn't the only linguistic contortionist. Just try finding any brokerage firm that hasn't embraced honorific titles for its brokers. If you pick up any stockbroker's business card today, you will find that they've morphed into financial consultants, wealth managers, retirement specialists and all sorts of other titles.”

Lynn says that this is not an inconsequential concern because “the stockbroker, who handles your stock trades and perhaps sold you some annuities, is essentially a salesman. If you're only buying shares of Apple Inc. or whatever other company you take a fancy to, maybe this won't matter. But if you expect your financial point person to provide you with a comprehensive plan that could include how you're going to fund your kids' college years and your golden years, you may have walked through the wrong door.”

Lynn points out and many agree that there are a number of brokers who are very intelligent and conscientious.  “The problem is that they can't call themselves fiduciaries. It's not that many brokers wouldn't love to be fiduciaries, but many firms routinely forbid it. In fact, ferocious battles have been waged by the brokerage industry in Washington, D.C., over something informally called the Merrill Lynch rule, to make sure that their sale forces don't have to behave as fiduciaries. If you're wondering who is winning the war, it sure isn't the investor.”

The important issue that you, the investor, need to understand is why you should seek advice from a fiduciary.  The Investment Advisors Act of 1940 obligates registered investment advisers (RIAs) to behave as fiduciaries.  First, a fiduciary must act in good faith when making decisions for clients. A fiduciary will only recommend investments that are in an investor's best interests. A fiduciary, who must set aside personal interests, discloses all his or her fees.

Lynn compares a broker’s responsibilities with those of fiduciary's.  “For starters, a broker's first loyalty is to his employer. Rather than recommending the best investments to their clients, brokers can skate by with the lower standard of suggesting ‘suitable” investments’.  Would you rather, for instance, have your broker recommend inexpensive mutual funds with a solid history of performance or stick you with a “suitable” in-house mutual fund dogged by high fees and a hideous track record?” 

A few years ago, Bob Veres, a financial industry observer, stated that some brokerage firms bragged that 70 percent of its broker fund recommendations were for in-house mutual funds. About three years ago, Merrill Lynch was using portfolio evaluation software that was designed to prohibit any portfolio recommendation for a client that didn't contain at least one Merrill Lynch fund.

Lynn adds that she doesn’t want to pick on brokers.  “It's to stress the importance of finding an adviser who is a fiduciary. What I find truly sad is that so many educated people don't even know what kind of folks they are relying upon for advice. Do you know if you are using a broker, a registered investment adviser, an insurance agent, or somebody else? And just because your financial guy doesn't work for an identifiable firm like Merrill Lynch or Smith Barney doesn't mean he isn't a broker. Many brokers are affiliated with broker-dealers that aren't household names. Some of these independent brokerage firms allow their reps to serve as a fiduciary, but others won't.”

How can you make sure you are hiring – working with a qualified professional?  You can start by thoroughly checking a financial planner or stock brokers background.  Abika.com can help you with background checks on financial planners and stock brokers.  A search can provide you with --- if a broker or adviser is properly licensed in your state --- if they  had any run-ins with regulators or received serious complaints from investors --- their educational background and where they worked before their current job --- if the firm that the broker or adviser works for is a member of SIPCF (Securities I)nvestor Protection Corporation--- any complaints rumors, awards, liens judgments and bankrupties ---- check 20 year address history --- statewide criminal history checkl.  

Do you deal with a traditional broker?  Not sure?  Look in the drawer in the desk with your files on your investments and look at papers you have filed away and see if they contain this statement: “Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits and our salespersons' compensation, may vary by product and over time.”

Then, you should ask yourself some questions.  Are you satisfied with the statement --- Our interests may not always be the same as yours.?  Are you satisfied with the statement --- We are paid both by you and, sometimes, by people who compensate us based on what you buy.?  Who can – should you trust?