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Why Don't You Just Give Your Broker a Gun and Tell Him to Shoot You?
A reader of my blogs sent me an e-mail with a Customer Agreement from a major brokerage firm. She asked me to look it over and tell her if she should sign it.
The first thing that struck me was this clause:
"Brokerage activities are regulated under different laws and rules than advisory activities and generally do not give rise to the fiduciary duties that an investment adviser has to its clients."
The agreement pointed out that the brokerage firm "...may face certain conflicts of interest and as such, its interests may differ from yours."
These statements are typically inserted in account opening agreements.
I asked the reader this question: Why would you entrust your assets to a firm that tells you it does not have to act in your best interests and further that it may have conflicts of interest with you which it will resolve in its favor?
It gets worse:
The agreement also provided that all disputes must be resolved by mandatory arbitration. Not before an impartial panel, but one appointed by FINRA, which is essentially a trade group for the securities industry.
William Galvin, the highly respected Secretary of the Commonwealth of Massachusetts aptly described FINRA's arbitration process in testimony before a congressional sub-committee as "an industry sponsored damage-containment and control program masquerading as a juridical proceeding."
Taken together, these clauses are a sucker punch for the unwary investor. The brokerage firm is telling you straight up that they will not act in your best interest. By consigning you to FINRA's mandatory arbitration, it is unlikely that you will get justice when you try to recover for their misconduct.
Why don't you just give them a gun and tell them to shoot you?
What's your option?
Don't play by their rules. Instead, if you need investment advice, retain a Registered Investment Advisor. They are required by law to be fiduciaries. If their agreements provide for arbitration, it will not be FINRA arbitration and you can often negotiate the removal of the arbitration clause altogether.
Just be sure the advisor focuses on your asset allocation and limits your investments to a globally diversified portfolio of low cost index funds, Exchange Traded Funds or passively managed funds.
The reader sent me this note: "Amazing how 90% of the public does not understand that they are the investor sheep heading to the Wall Street butcher shop."
My sentiments exactly.
The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.
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Good article. I wish everyone I knew would read it.
If an advisor had good advice to offer, they wouldn't have to sell themselves in order to dispense it, they would just follow their own advice and make themselves wealthy.
Even when someone is honestly trying to give good advice, which is very, very rare, who is to say that they are not mistaken, and that their mistake will not cost you all of your fortune?
That sounds like the fine print on a Greyhound bus ticket. You think you're paying for a specific service, and you're really just getting serviced.
Stock brokers are in for themselves. If you want complete control over your investments, open a self directed IRA. You will them be the manager of your IRA and invest in anything you see fit (except for collectibles and life insurance policies). Take control of your own money now!
P.S. I do NOT work for a self directed IRA Custodian but Do have my own self directed IRA.
I see Mr. Solin refers to us retail customers as 'sheep'. I agree 100%, and have even been criticized here for using that term.
Anyways, since I've pretty much decided not to wait for my broker to shoot me, where *should* my money be re-depolyed? I'm 52 years old.
Excellent column and discussion.
Where have people gone wrong, We now being the majority and having money of our own should reconsider the purpose of money.. Money was something Kings once ruled over us, riches and power, today having money is our right but it seems we give into those having money before us by playing by their rules at all. The purpose of money is the facilitate the exchange of goods or services. Money does not earn money, work earns money and the more we begin to live by that philosophy the more equitable money shall be. People who live without enough money to invest live by two codes, barter and money. The more we work the more we accumulate the more we accumulate the less we need money. Independance is something we can strive for, we can acheive a balanced society where we do not need the money of the rich. let them worry about the stock crashes while we enjoy the investment in our own lives ...
Gypsy
Ironically, the cost of trading small blocks of US Treasuries and other bonds traded over the counter remains high for retail investors: at least 1% for Treasuries, based on my experience and 2 or 3% for municipal bonds. Treasuries are best bought at auction using non-competitive tenders. Munis should be bought as new issues only. Retail investors should not plan on trading their bond holdings as if they were stocks. Bond markups and markdowns vs. the prices you see in Barron's or the Wall St. Journal are too high for the small investor.
I am not surprised by the broker disclosure forms. Do you really expect a broker to recommend a no-load mutual fund with low management fees, which is in your interest but not his? If you use a broker you should expect to pay a commission to the broker, either through an upfront sales charge (load) and/or through higher annual fund management fees, part of which may be rebated to the brokerage firm and/or through a back end sales charge. If you want low costs, do it yourself and don't rely on a salesman at the brokerage firm and don't use a financial planner or an adviser. No one works for free. Did you know that 40 years ago, Templeton Growth Fund an an 8.5% sales load and that the stock commission on a trade of 100 IBM shares was $75? Today, many no-load funds are available with low management fees and you can buy or sell 10,000 shares of IBM for under a $10 commission. Some things have gotten much better. But you have to be willing to do some of the work yourself. Here is a fixed commission schedule from 1969: http://books.google.com/books?id=CZSmnYCETqoC&pg=PA133&lpg=PA133&dq=fixed+stock+commission+rates+in+1969&source=bl&ots=olr6qb6wVw&sig=C00s0HUbCRAZeYqhjhsuJ8sWQUY&hl=en&ei=ke1dSvf3G4j-sQO11IWpCg&sa=X&oi=book_result&ct=result&resnum=1
Dan..Dink is right....Bernie was an RIA...they can still be as corrupt as a commissioned broker..as they work for a fee..usually 1% give or take...AND...their minimum account is frequently $5 Million...okay..some will take $1 Million...the guy with $15,000...screwed either way..It makes me so sad..I've been a retail broker since 1983..and have seen HORRIBLE trades by other brokers...like..a mutual fund instead of a CD..when a CD is called for (I've also worked compliance...and wrote up SO many brokers)....is IS a conflict...true..and RIA will make more as your account grows..and a broker will make money going into a stock (or an ETF)...and going out...unless it's done in a managed program..the it works just like an RIA...a percentage of value...and can be as little as 1%...
I don't know what the answer is..even deep discount firms now push their employess to cold call....and duh...at $7.00 a trade..don't ya think scottrade or e-trade or whoever...NEEDS high turnover...buy and hold makes them so very little...I have NO answers...and do prefer the RIA over the commission approach...but it remains caveat emptor...
Since my grandfather died my gradmother is lost about how to managed the finances of the family-owned business that she inherited. The accountant my grandfather appointed to managed them retired years ago and the new people handling her accounts do not have her interests at heart at all. She is obviously elderly, but they used risky investment strategies with her money leading her to have huge loses last year. I really appreciate the help, because we need to find someone trustworthy to manage her money and no one in our family is in finance.
Thanks!
Mr. Solin, you have exposed the ways CNBC does not provide true business journalism. At the risk of being redundant, I believe this article also applies to CNBC and the advisers they present. A current case is their handing of Len Dykstra over the last two years.
When he wasn't stock picking, CNBC simply would run fluff pieces about how well his services provided for retired professional athletes. (See below link)
Now Dykstra has filed bankruptcy. As further proof of spinning credentials, Dykstra stated after the filing, again on CNBC and posted as an article here on Huffington Post; that he really wasn't bankrupt. It was "only a chapter 11", a reorganization. He also is claiming he is a victim of fraud. I'm sorry Len, I don't care what chapter you use, your future business plan, or your intentions; you have still filed bankruptcy. CNBC also didn't correct the fact the Trump has never filed personal bankruptcy, although he has had two corporations that have.
http://www.cnbc.com/id/16562185/
Player's Club: Major League Investing For Ex-Pros
10 Jan 2007
See Dan Solin's Profile
I agree totally. Even more shameful was Cramer's endorsement of Dykstra's stock picking abilities: "He is one of the great ones." My views on Cramer are well known. This latest debacle validates them.
See Dan Solin's Profile
Because the seller of widgets is not spending hundreds of millions of dollars in advertising to persuade you to repose trust and confidence in him and you are not relying on him for financial advice.
Dan the Man!
I'm not sure why it should come as a surprise that a broker isn't on the side of the investor. The broker is selling a product, much like a store sells widgets. I don't expect the owner of the widget store to look out for me, so why should I expect that of the broker?
First, if the broker is to stay in business by retaining clients, it only makes good business sense to sell a good product or service. That goes hand in hand with looking out for the customer. All businesses strive to do that. I do expect the owner to look out for me in that he will not sell broken or defective widgets.
Additionally, there is an expectation, if not the outright claims of safety and big returns with some of these funds. If that is not true, then we move from conflict of interest to outright fraud.
There are enormous differences between the two. The most important focuses on the nature of the product. A widget is an object whose tangible qualities you can directly observe. I can evaluate the product for for myself as to its usefulness and value. The broker is selling information and opinions on which you will make future decisions. That the customer cannot evaluate this information directly is evident by the fact the customer went to the adviser in the first place - they went because they could not determine a good investment decision on their own. It's the same type of relationship with a medical doctor, you see them because you don't know what is making you sick. Medical doctor-patient relationships depend on trust in the same way that a broker-client relationship does. In order to recover (or make money) you rely on the expert providing you information that is in your best interest alone. This is why doctors and medical researchers must guard against conflict of interest. Medical research performed by the manufacture is seen as less credible than by impartial researchers. Even the suspicion of conflicts can grow into a major scandal. The only reason to be blase about financial conflicts of interest is because we are so used to being taken advantage of that it just seems normal, but, that does not make it right.
I don't disagree with your main point, but I think the burden is similar throughout. Widgets, even products aren't always tangible. How many toys were sold at Wal Mart, only to find out months latter there was lead paint in the product? Sometimes the dangerous aren't apparent and it is up to the owner along with government oversight to ensure product safety.
The conflict of interest in widgets is the balance between acceptable risk and higher profit. Many businesses do cost benefit analysis and weigh the cost of litigation risk against potential profits of not correcting a product.
Bernard L. Madoff Investment Securities LLC was a Registered Investment Advisor.
See Dan Solin's Profile
I did not mean to suggest that all Registered Investment Advisors are competent or even honest. Investors can protect themselves by undertaking some basic due diligence. In addition to the criteria set forth in my blog, it is critically important that your assets are held by an independent custodian who is a household name, like Charles Schwab, Fidelity and TD Ameritrade.
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