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Question Of The Month – September 2008 Where Should I
Obtain Investment Advice? Question Of The Month – September , 2008 Where Should I Obtain Investment Advice? Lynn O’Shaughnessy, one of my favorite financial columnists (San Diego Union-Tribune), raised some concerns 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.” The people who belong to the National Association of Personal Financial Advisors, were not happy. Peggy Cabaniss, the NAPFA chairwoman, said “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 whose only loyalty, both financial and legally, is to their employer.” Most of the folks who rely on stock brokers for investment advice 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. “You see, 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 a 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 respected 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.” 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.? Do you know if you are using a broker, a registered investment adviser, an insurance agent, or somebody else? Should you? “Sure, it’d be great to get out of stocks at the high and jump back in at the low, and if you know how to do that, then do it. But I’ve been in this business for 55 years and I don’t have any idea how to do it. In 55 years in the business, I not only have never met anybody who knew how to do it, and I’ve never met anybody who had met anybody who knew how to do it.” John Bogle, founder and former CEO, Vanguard Group
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Question Of The Month – September , 2008
Where Should I Obtain Investment Advice?
Lynn O’Shaughnessy, one of my favorite financial columnists (San Diego Union-Tribune), raised some concerns 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.”
The people who belong to the National Association of Personal Financial Advisors, were not happy. Peggy Cabaniss, the NAPFA chairwoman, said “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 whose only loyalty, both financial and legally, is to their employer.”
Most of the folks who rely on stock brokers for investment advice 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. “You see, 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 a 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 respected 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.”
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.?
Do you know if you are using a broker, a registered investment adviser, an insurance agent, or somebody else? Should you?
“Sure, it’d be great to get out of stocks at the high and jump back in at the low, and if you know how to do that, then do it. But I’ve been in this business for 55 years and I don’t have any idea how to do it. In 55 years in the business, I not only have never met anybody who knew how to do it, and I’ve never met anybody who had met anybody who knew how to do it.” John Bogle, founder and former CEO, Vanguard Group