One of the most popular recent posts on our Smarter Investing blog is from Covestor Advisory Board Chair Kimberly Clouse outlining six good reasons to fire your broker.
Kimberly writes about how chronic lagging performance, failure to understand your investment goals and opaque fees are all warning signs that your broker doesn’t have your best interests at heart.
Here’s another reason: Wirehouses destroy an estimated $50 billion of portfolio value, every year.
Rudy Adolf, CEO of Focus Financial Partners, writes:
As victims of their histories and their own legacies, the wirehouses have a business model that just cannot support them. And since the problem is intractable, they have been forced, among other things, to create inflated and opaque pricing structures that are then handed down to the brokers to implement. Because ultimately, wirehouses cannot sustain their businesses without this revenue stream.
With so much personal savings at stake, it’s critical for investors to understand the difference between brokers and registered investment advisors (RIAs). Brokers and RIAs have different fiduciary responsibilities to their clients.
Brokers are usually compensated by charging commissions when they sell financial products to clients. Brokers are required to sell only investments that are “suitable” for their clients. Yet as Adolf points out, wirehouse brokers are often under pressure to sell products that generate fees for the firm and themselves – but that may not be best for clients. In other words, there is the strong potential for conflict of interest.
RIAs, meanwhile, are held to stricter fiduciary obligations. They are obligated to put clients’ interests first and to fully disclose any potential conflicts of interest. RIAs typically charge fees for advice, or as a percentage of assets under management.
Yet the legal distinctions between brokers and advisers may become less pronounced with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act after the financial crisis. Dodd-Frank allows the SEC to hold brokers to the same fiduciary standards as advisers. Earlier this month, SEC Chair Mary Jo White said the regulator is still trying to determine whether it should standardize fiduciary rules for brokers and advisers.
The bottom line is that at least for now, investors need to understand the standards that various investment professionals are held to, whether they’re brokers, RIAs, certified financial planners or something else.
Please note that individual situations can vary; therefore, the information should be relied upon when coordinated with individual professional advice. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.
Covestor Ltd is an SEC Registered Investment Adviser.
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