What’s Broken in the Brokerage Industry

Admission: I worked in the brokerage industry for over 10 years and feel as though I was successful for my clients, my employer, and myself. That being said, there are many things in the brokerage world that incentivize behavior that is not in a client’s best interest. The most glaring example of this is how a broker or financial advisor is compensated for selling a particular product or money manager.

I won’t bore you with too much detail, but let’s look at a brief example: let’s say that you, the client have $100,000 that you would like to invest. Somewhat obviously, there are many factors that I the advisor should consider before making a recommendation. However, let’s assume that I have followed a process that uncovered most of what you were looking for in terms of risk and return. If I am at a firm that provides a reasonable array of products, there would literally be thousands of investment options from which I would be able to choose.

Here comes the interesting part: almost every option pays me and my firm differently. In one option, my firm (I would receive a fraction of what the firm gets paid) receives a one-time fee of about $1,750 to invest your $100k. In another option, my firm receives a one-time fee of about $7,000 for investing the same amount of money (Just in case you’re wondering, the ongoing fees to the firm are relatively similar in both cases).

That’s a large difference. I’m also pretty darn confident that I could convince you or anyone else that either product is the right fit. Under current brokerage industry rules, that is all I would be required to do. In addition, my employer would require me to attain certain revenue goals each month or quarter. If I were unable to reach these goals, I would be at risk of losing my job. Does this arrangement put an advisor in the position to act only in the interest of his clients?

Enter the role and requirements of an independent, fee-only fiduciary. This type of arrangement legally requires an advisor or planner to act in a client’s best interest, and the advisor cannot receive any fees from outside companies. In the end, trusting who you are working with to manage your money and generate a financial plan is the most important factor. However, I would argue that choosing a firm that is required to put your interests ahead of its own is a better choice.

What’s Broken in the Brokerage Industry
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