Brokers should care if their clients make money? What a concept!
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What’s wrong with this word-picture? Let me rephrase: How many things can you find wrong with this word-picture?
While the issue of broker responsibility is not new, it has resurfaced as Congress has been considering financial overhaul legislation. In his original draft, Senator Christopher J. Dodd, chairman of the Senate Banking Committee, proposed requiring brokers to put their customers’ interests first — what is known as fiduciary duty — when providing investment advice. But in recent weeks, the chances of this proposal’s making it into the bill began to dim.
via Trusted Adviser or Stock Pusher? The Financial Overhaul Bill May Not Settle It – NYTimes.com.
The sheer horror if this kind of came at me in waves. First, the realization that existing law does not make it illegal for a broker to knowingly provide lousy advice to clients so that their trades line his pockets at the expense of theirs. Then, the realization that there is any opposition to making such fraud illegal. Followed by, what, there is SO MUCH opposition to making this illegal that the bill won’t pass?
Okay, there is a certain amount of caveat emptor built into any compensation system based on the idea that the more of our money our “advisors” spend, the more of our money they get. I never understood why people readily hired interior decorators who got paid a percentage of the cost of the furniture and such that they buy. Yeah, that’s a real incentive for decorators to find me great bargains, right? Similarly, I don’t understand why companies routinely hire real estate brokers to help them find office space and negotiate terms — even though the broker’s commission is a percentage of the first year’s rent. Once again, where’s their incentive to find me great space at a low price, and to haggle the rent down even further? My bargain comes out of their pocket.
But in those cases the contracts are pretty explicit, and anyone who agrees to that fee structure gets what they deserve. With brokers, it isn’t as cut and dried.
Which brings us to the tsunami-force wave of horror that washed over me as I read on. Apparently, the bad advice is a huge source of profits for the banks:
Imposing a fiduciary requirement could have an impact on investment firms’ profits. Guy Moszkowski, a securities industry analyst at Bank of America Merrill Lynch, said that the impact of a fiduciary standard was hard to determine because it would depend on how tightly the rules were interpreted. But he said it could cost a firm like Morgan Stanley Smith Barney as much as $300 million, or about 6 to 7 percent of this year’s expected earnings, if the rules were tightly defined. “It’s very nebulous, but I think that is a reasonable estimate,” he added.
In a research report about Morgan Stanley last year, Mr. Moszkowski wrote, “Financial advisers will be expected to take into account not just whether a product or investment is suitable for the client, but whether it is priced favorably relative to available alternatives, even though this could compromise the revenue the financial adviser and company could realize.”
To my knowleddge, neither Morgan Stanley nor any other bank sued Mr. Moszkowski for libel, which leads me to believe that his estimates are correct. So let me get this straight: As much as 7% of Moran Stanley’s profits this year come from deliberately steering clients to over-priced or inappropriate investments?
Maybe there should be a Chinese Wall — financial advisors get paid flat fees, brokers get paid commissions, advisors don’t trade, brokers don’t advise. Best case scenario of all: The financial advisor is with a different firm than the broker you use. The problem, of course, is that not everyone can afford to hire a separate financial advisor, and without the trading commissions, I imagine the price of one would be fairly steep.
Full disclosure: I have no intention of following my own advice here. My financial advisor is also my broker, and he got me through the meltdown with minimum pain. In fact, the only times my portfolio has tanked in the 10 years I’ve worked with him has been when I haven’t taken his advice (he started trying to get me to dump my NYTimes stock more than five years ago!). The guy clearly does feel a fiduciary responsibility to me, and I wouldn’t trade him for a pack of independent advisors.
But I lucked out, I hooked up with someone who turned out be an honest, brilliant guy. And this should not depend on luck. So sure, I wish we lived in a society where we could take this for granted. We don’t. And if we need a law, then let’s pass one.
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“Imposing a fiduciary requirement could have an impact on investment firms’ profits.”
Caveat emptor.
Now the question is how tightly should brokers be controlled? And will these controlled work?
I don’t know. But I suspect not. Fear and greed drive the financial markets. Trying to legislate greed out of the markets seems like a failing proposition to me.
So we’re back to: “Caveat emptor”
The stock markets are nasty places. With everyone looking out for “number one”.
The answer is to do what Claudia has done. Find someone who’s interests overlap yours, and stick with them.
We have no disagreement. But the question is, how do you know if someone’s interests overlap with yours? I don’t claim to have done a huge amount of due diligence to find Roei — he took over my prior broker’s client list, and I came with it. And my prior broker, btw, got me into tech stocks in the height of the market, and came close to wiping me out. There was nothing nefarious going on, he made bad judgement calls and came close to wiping himself out as well. Still, if anyone should have been wary it’s me. By way of saying — yes, it’s caveat emptor, but maybe brokerages should be required to trumpet that fact, much as cigarette makers have to put health warnings on packages…
In response to another comment. See in context »“But the question is, how do you know if someone’s interests overlap with yours?”
Hi Claudia
Excellent question. Word of mouth and referrals from friends can help with that a bit I suppose.
But that’s so 20th century
Recently I joined TheFunded.com
Which, in their own words, “is an online community of entrepreneurs to research, rate, and review funding sources worldwide.”
http://thefunded.com/
TheFunded.com helps to level the playing field for entrepreneurs. We swap info and reviews on Angels and VCs.
Maybe someone should start a similar site that reviews brokers and investment bankers?
I’d like to suggest TheBanksters.com as a possible URL.
Please, somebody, anybody, run with this idea.
Just remember to send Claudia and I our royalty checks on time….
And Ken and I promise that we will not endorse those royalty checks over to some broker that we haven’t checked out….
In response to another comment. See in context »Brokers are like congressmen – everybody else’s is a crook. My broker has done well by me, too, but then he doesn’t work for Merrill. Unfortunately, laws that enforce fiduciary duty seem impossible to enforce.I’d settle for transparency in brokers’ compensation. At that point if you can find a Facebook community to help you understand your broker’s compensation statement, you might be able to take care of yourself.
The funny part is, my broker actually DOES work for Merrill. As did the one who — through mistakes, not fraud — cleaned me out. And as did the one before him, who helped me make all the money that the second one got rid of.
In response to another comment. See in context »But fundamentally, you and I agree. Again. This has been happening a lot…