>Secrets of the Wirehouse Repost

>It’s been nearly five years since I wrote “Secrets of the Wirehouse” and I feel it is time to update it and add to it and sometimes subtract from it. You can read the original piece by clicking here. I encourage you visit my blog at http://themeridian.blogspot.com for updates on current financial events. Visit Scott’s website at www.meridianwealth.com.

Secrets of the Wirehouse

And How to Protect Your Best Interests

About the Author:

Scott Dauenhauer spent five years working for the “big three” brokerage’s and gained his knowledge first hand. He is now a Certified Financial Planner and has a Masters Degree in Financial Planning. Scott is the Owner and President of Meridian Wealth Management, a firm dedicated to protecting client interests. He believes in focusing on people not products. Though he believes there are some good people at brokerage firms, he thinks the vast majority fall extremely short of what is needed to advise a family on a subject as important as Financial Planning.

To find out more please visit his website: www.meridianwealth.com

Most Brokers Do Not Have Formal Training in Financial Planning

How much training do brokers actually have in financial planning? Major brokerage firms tout intensive training programs almost as much as the stocks they peddle. They brag about the high level of education their “consultants” receive. The truth is the only requirements are that individuals pass the Series 7, and a state insurance exam. The Series 7 is an industry test that requires memorization of facts about the markets and represents a minimum standard of knowledge.

The Series 7 does not teach an individual how to manage personal finances, let alone create a comprehensive financial plan. The Series 7 doesn’t even teach about how to properly diversify a portfolio. The insurance exam is an even bigger farce. While the Series 7 actually requires a bit of studying the state insurance exams only require minimal memorization. In California you are required to attend a 52 hour class in order to sit for your insurance exam. The class I took was excessively boring and did not teach anything about actual insurance policies or how to determine the proper amount of life insurance for an individual or family. Worst of all at the end of the 52 hour class the instructor gave you all the questions that would show up on the exam and the answers, almost word for word (I know, I took the exam and was shocked to see nearly the exact same questions).

The only thing they didn’t give you was what order the questions would be and whether the answer was a,b,c, or d. I would be willing to bet that by the time my son is 7 years old he could pass this exam. I think this is less a securities scandal and more a state governance scandal (the excuse by the state is that an easy test promotes more people in the insurance business and that the insurance companies will train the individuals……and you wonder why there is so much insurance fraud).

Anyway, once a “recruit” passes the Series 7, he/she is sent to company headquarters to go through “intensive training.” The training is definitely intensive, though not in financial planning or investment management. The programs focus solely on sales & product training and lasts anywhere from 1-4 weeks. I attended one such program and 95% of the training focused on cold-calling sales and learning proprietary product. Proprietary products are ones that are sold directly (and typically only) by the brokerage firm and typically have much higher profit margins, though mainly benefit the firm, not the person they are sold too. Brokerage firms want “salespeople,” not highly skilled financial planners.

If the firms hired highly skilled financial planners, the firm wouldn’t be able to sell proprietary products. This is because the planners would know better. When the firm hires somebody with no previous industry knowledge, or experience, they have the opportunity to fill that person’s mind with fairy tales, not fact. The firms’ way of doing business is to focus on proprietary products, high & hidden fees, cold calling, and quotas. The truth is that very few new recruits have any experience in handling another family’s wealth. You end up paying high fees for a service that puts you directly on a recruit’s learning curve. Even brokers who have been at the firm for years may not have any training in financial planning; they are stockbrokers, not trusted advisors.

As the years have gone by firms are moving slowly away from proprietary products, though not entirely. It would not be unusual to be sold a hedge fund, futures fund, or separate account, or variable annuity that is more all intents and purposes proprietary (despite a name that is different than the brokerage firms name).

Your advisor should have prior experience in financial planning and be Certified Financial Planner at a minimum, if not; you are putting your family’s wealth at risk. Please don’t let your finances be somebody else’s training ground.

Your Mutual Funds Are NOT Free

Mutual funds have grown into a huge industry. Once a small subset of money management, they have grown into a product that is now held by a large percentage of American households. There are now more mutual funds in the U.S. than stocks that trade on the NYSE. The proliferation of this medium of investing has empowered the individual investor. However, at the same time it has powered the Mutual Fund and Brokerage industry to record profits. Many of these companies are pulling the wool over your eyes. Most investors do not understand the fees accessed in their mutual fund. Even “no-load” funds have expenses. Though most of the costs are disclosed in the prospectus (good luck deciphering), some are not.

You will never see a bill for your mutual fund because the expenses are hidden. They may be hidden, but believe me, they exist. There are four major expenses involved with mutual funds (and a few minor ones). The first expense is the Expense Ratio; this compensates the manager, analysts, board of directors, and pays printing, mailing, & overhead costs and ranges from .20% to 2.0% annually. The average is about 1.5%. The next cost is what the industry refers to as a 12b-1 fee; this is basically a hidden commission. The 12b-1 fee pays to bring in new shareholders and has zero benefit to you. It varies depending on what share-class is sold to you and runs from .25% to 1.0% annually.

The last two expenses are not actually printed anywhere, you have to calculate them yourself. These expenses are spread/impact costs and transaction expenses. Every time your mutual fund buys and sells stock there are costs. The more a fund trades the more expenses YOU incur. In November of 2004 a study was released by the Zero Alpha Group (click here for the study) that stated “U.S. investors in equity mutual funds are paying $17.3 billion in hidden mutual fund trading costs that are not reported openly in the stated expense ratios of mutual funds.” The study found that on average brokerage commissions add .38% to a funds annual expense and trading costs (spreads & market impact) add another .58%. The study also found that these costs are much higher for small stock funds than large stock funds. On a conservative basis most mutual funds have additional undisclosed costs that total nearly 1% and in many circumstances higher.

Another cost you do not see is what John Bogle refers to as the “cash drag factor,” basically most mutual funds are not fully invested, they keep anywhere from 1-10% cash on hand. This hurts the performance on the upside but cushions it on the downside, since the market has gone up more often than down, the cash in the fund brings down the performance. Bogle estimates it to be about .6% on the high end. Let’s add up all the potential costs of a mutual fund, keeping in mind that brokerage firms are known for being on the high end.
Passive Low End Active Normal
Cash Drag 0% .60%
Expense Ratio .20% 1.33%
12b –1 Fee’s 0% 1.00%
Trading Costs .06% 1.00%

Total Costs .26% – 3.96%

The low end cost represents a person not receiving any advice; a typical fee for a professional advisor is .75% of assets annually bringing the total low end cost to around 1.00%. Not all broker sold funds have costs that are as high as shown above, however the average is somewhere between 2 – 3% annually.

Does your broker have your best interests in mind when he is charging you 2 – 4 times what a professional competent financial planner might charge? I would argue not.

Conflicts of Interest Abound – More Strings Attached Than A Marionette Puppet

Conflicts of interest exist in almost any business, the mere presence of a conflict does not automatically lead to a persons interests being wrongfully represented. However, all conflicts that are known should be disclosed in writing to the potential client before a relationship starts.

When dealing with brokerage firm conflicts of interest abound and for the most part are not disclosed. The following is a few conflicts that you should watch out for.

First, please understand to whom a public company owes their loyalty; it is to their public shareholders. The people who own stock in a company must have their interests protected. A public brokerage firm’s loyalty cannot be 100% to you.

Let’s take a further look at where other strings are attached. A broker gets paid a percentage of the revenues that he/she brings to the firm, typically 25-40%. It is not, however, that simple. Brokerage firms determine the payout percentage for each individual “product.” They control product flow by paying higher amounts to brokers for product they want sold (typically products with higher margins). While this makes sense from a business stand point and from a shareholder standpoint (why wouldn’t you want to incentivise your staff to sell the most profitable products?) it doesn’t work out so well for the end user, the client. Each firm works differently but depending on the product a firm wants to emphasize, they will pay a broker a higher percentage of the revenue to induce him to sell what the company wants him to sell. For example, if the company wants a broker to sell a Separate Account Platform product (individual money managers, more to come on this), they may tell the broker that they will receive a higher percentage of the fees they generate from that particular product and that product may generate more fees than other products.

Let me give you a real life example so that you understand.

Imagine that you had only two products to choose from to sell your client; one is a mutual fund that costs the client 2.25% annually and pays the firm 1% annually. Of the 1% paid to the firm the broker collects 35% of it or .35% annually. On a $1,000,000 account the firm generates $10,000 in revenue and pays the broker $3,500 (you the client pay $22,500). The other product is a Separate Account where you have an individual money manager. This product is sold as the latest, greatest way to have your money managed and costs 2.5% annually. However, this product pays the firm 1.5% annually and the firm will pay the broker 40% of that revenue or .60% annually. On the same $1,000,000 account the firm generates $15,000 in revenue and pays the broker $6,000 (you pay $25,000 annually). Now, in all likelihood both accounts will have similar returns over time and will probably under-perform the market. You the client in either situation are stuck in a lousy product that is expensive; however the firm has an incentive to sell one over the other, even if the other isn’t in your best interest. The separate account sale earns the firm 50% more revenue and the broker 70% more revenue – which product do you think will be presented? Each firm has their own system and they are all different, but the mechanisms are in place to manipulate the broker into selling what makes the firm and/or the broker more money.

In 2000 I wrote the following:

“A more blatant conflict is a practice that people thought was eliminated a long time ago. Some brokerage firms pay their brokers more for selling proprietary (company managed) mutual funds. To be fair, most firms have eliminated this practice, to which I applaud them, however there is still at least one major brokerage firm that sill pays brokers up to 25% more commissions to sell their company managed mutual funds over other competing funds. In addition, the more company managed funds a broker sells, the more perks they receive. Whether it is a trip, an expense account, or personal gifts, they do not receive these perks if they sell other companies funds.”

The firm I was referring to at the time was Morgan Stanley Dean Witter (now Morgan Stanley) and I don’t know if they still pay more for in house funds, but I do know that they got into a lot of trouble with the New York Attorney General and the Securities and Exchange Commission for using the allure of trips and other incentives to sell funds that they had special arrangements with. Morgan Stanley was fined $50 million, though I doubt they’ve learned their lesson. I reported on all of this going on back in 2000 before Eliot Spitzer and his gang tackled Morgan and much of the industry.

The other mutual fund scandal that was uncovered that wasn’t news to me (or anyone in the industry) was the “shelf space” arrangement. This is your basic pay to play arrangement. Certain mutual fund companies receive more access to brokers to sell their funds and more attention is paid to these funds in exchange for a basic kickback on all sales made in that fund forever. The basic system would be that a fund company could get on a brokerage firms “Preferred List” by promising to make certain “revenue-sharing” arrangements with the brokerage firm. These revenue sharing arrangements many times were simply kickbacks paid for being on the preferred list and receiving preferred access. Mutual fund companies didn’t get on a preferred list because they were the best in their class, but because they paid more than another fund company might be willing to pay. Thus the client is more apt to be recommended a fund from the preferred list even if it isn’t the best fund. Despite large fines and penalties and lots of bad press this practice continues, but at least it is now disclosed on brokerage firm websites (though I would venture to guess you’ll never hear about it from your broker). To see Morgan Stanley’s lengthy disclosure click here.

In addition to higher revenue on proprietary products, the broker many times is under tremendous pressure from management to sell you the latest mutual fund offering from that brokerage. Branch manager compensation is determined in part by the amount of proprietary products his branch sells. His interest is in getting the highest bonus possible, so he in turn puts the pressure on the brokers to “pound the phones,” and sell their “latest offering.” The brokers are enticed by management with trips, dinners, and a host of other items. It goes unspoken that if a broker does not participate in selling the new offering then things will not be easy for him/her. I know of one broker who was told, “I don’t think this firm is the right place for you,” after the broker refused to sell the new fund offering. It turned out that he was the only one to not succumb to the pressure, he eventually left that firm. I can’t begin to tell you how many voice mails & e-mails I received from management to ‘sell’ the “new” offerings, I never succumbed because it was not in my client’s best interest. Be aware that the pressure is on your broker to sell certain products or else he/she risks losing their job.

The Broker Food Chain

Guess how many entities get paid on your mutual fund purchase? You’d be astonished.

O.K., we’ve established that you pay higher costs to work with an advisor at a major brokerage firm. But who actually receives the fees that your mutual funds, and managed accounts generate? You wouldn’t believe all the entities that must be paid from your simple purchase. Most investors believe 100% of the expenses or fees go directly to the broker. Actually a very small percentage actually ends up in your broker’s pocket (which must make you also question the intelligence of your broker). In most cases the portion of the fee that the broker receives is 25-40% of the revenues your account generates for the firm. If this sounds confusing, it is, most brokers don’t even understand their own pay structures (which is exactly what the firm wants).

To help you understand, let’s take a look at a mutual fund. A typical broker sold mutual fund will have total expenses of about 2 – 4%. As I showed you in the earlier example on a mutual fund the firm might generate $10,000 on a $1,000,000 account (annually). Of the $10,000 the broker might get paid $3,500 (.35%). So where does the rest go?

It goes to pay for the fancy office, the mutual fund manager, branch manager, profits, internal departments, performance reporting, analysts, wholesalers, and a myriad of other things. Don’t get me wrong, I don’t believe profit is a dirty word; however there is a difference between profit and gouging. Your costs are high because there are so many people and departments and corporations that must receive a portion of your fees.

Let me break down the food chain for you. A person referred to as a wholesaler supports your broker, the wholesaler is the person who sells products to your broker from his/her mutual fund company. The mutual fund that employs the wholesaler also employs your fund manager and analysts to support him/her. The fund must also pay to transact business (although this cost is passed onto you, though not disclosed). The fund company and the brokerage firm must then pass along profits to it shareholders by either a higher stock price or dividends. As you can see, there are more entities getting paid on your mutual fund than you can count on one hand. I call this the Broker Food Chain. Your mutual fund purchases must make a lot of entities a profit, your broker, your brokerage firm, and the fund company, the question remains whether or not you get any profit? The broker food chain does not work in your best interest.

Insurance costs! What Your Broker Doesn’t Disclose About Their Commissions

Did you know that your stockbroker or advisor at your major brokerage firm now sells insurance? That’s right, everything from Term life to Long Term Care. Most brokers got their insurance license so they could sell you annuities (we will get to that next); they discovered however that commissions are much more lucrative in insurance than anything else. So are you to believe that your broker is now an expert in matters of insurance? Don’t believe it. Unless he/she has been through special programs like the CFP, CLU, or CHFC, they may not be qualified to offer you advice; of course that does not stop them. Of the three the CLU is the by far the strongest mark for insurance. Insurance is a complex world and if purchased incorrectly it can do a lot of harm to you and your estate.

Commissions can run anywhere from 50-120% of your policies first year premium. Surprised, don’t be, they’ve always been that high. Actually, it’s not the commission that really upsets me. If a professional does his/her job correctly and has the knowledge, training, & expertise and makes an unbiased recommendation than the commission can be justified. The problem I have is with disclosure, or rather the lack there of. Very rarely will your broker disclose what he/she is being compensated or about the potential surrender charges. The other problem I have is that many times the broker will see commissions and the appropriateness of the product as separate decisions, giving more weight to the commission than the appropriateness of the product. Many times this is done in haste because the broker simply doesn’t understand what is or isn’t appropriate. Most brokers receive sales & product training, not financial & wealth management training. In most cases your broker is a marketing representative for a large publicly traded company, not a trusted advisor like they claim.

In addition, brokers cannot go out into the marketplace and choose any provider for insurance, they must stick with pre-approved “preferred” insurance providers, well, we already know what it takes to become “preferred” at a brokerage firm, don’t expect your best insurance interest to be looked after at a brokerage firm.

Annuities, Hazardous to Your Wealth?

Annuities are an interesting product. They come in all sizes, shapes, and forms. You have probably heard of both fixed & variable annuities. Fixed annuities pay a fixed interest rate as stated in the contract for a specific time period (similar to a CD). Variable annuities performance is based on an underlying “sub-account,” basically a mutual fund. The major benefit to an annuity is the ability to defer taxes until the money is withdrawn. Another highly touted benefit is that an annuity can pay an income stream for life. Let me lay out a case for why variable annuities may be hazardous to your wealth.

It has always been said that annuities are “sold,” not bought by investors. Over 90% of all annuity sales are through brokers or life agents, a viable no-load Variable annuity industry has not emerged. Why are so many people sold annuities? The answer is simple…. high commissions and great sounding stories. There are some annuities that brokers sell that pay the broker in excess of 10% commission (though this is mainly in reference to Equity Index Annuities, another topic). This leaves you with an expensive policy and surrender charges that may last more than a decade. The expenses inside an annuity are one of the main problems. There are several expenses involved. Today most annuities do not charge you an upfront commission, the fee is charged as an annual fee (which you don’t see). This fee is deducted daily from your balance, there are five possible costs. The costs are: The policy charge, Mortality & Expense, Rider charges, underlying sub-account expenses, & transaction costs associated with those sub-accounts. Below is a range of what these cost can add up to:

Policy Charges – $30-50

M & E – 1.0 – 2.0%

Riders – .25 – 1.25%

Sub-Accounts – .25 – 1.50%

Turnover costs – .06 – 1.00%

Total Costs – 1.56 – 5.75% annually

The average cost runs about 2.5 – 4% a year. These expenses take a toll on the ability of the portfolio to match, or even beat the market. The annuity has to earn 2.5-5% before it breaks even for the year. Add the fact that gains in an annuity are taxed as ordinary income when withdrawn and the chances of your annuity beating your taxable account come close to zero. In addition, if you die with an annuity you do not receive any favorable tax consequences. You lose what the tax code refers to as the “step-up” in basis, meaning that if you die with a taxable account the entire account gets passed on to your heirs with no income or capital gains tax, not so with an annuity. Studies have shown that even low cost annuities do not produce tax benefits big enough to beat an index fund in a taxable account. In a taxable account you receive a tax break if you hold your fund or stock for one year or more, not so with an annuity (plus dividends are now only taxed at 15% on the federal level, though this is set to expire). Lastly, you have very limited choice of investments in the annuities and if you want to take your money out before age 59 ½ you are out of luck, you would owe a 10% tax penalty.

You may ask “what about the guaranteed death benefit?” It is basically worthless in most circumstance. Annuities are long-term investments, they are not meant for periods of less than 10 years. If you end up being one of those poor unfortunate souls that bought at the top of the stock market and still have less money than you started with 10 years ago (extremely unlikely, but it happens, though usually do to idiot broker advice) then your loss exposure is likely minimal. An amount that will be less than what you probably paid for the insurance over that period. In any event, the death benefit is not a logical reason to purchase an annuity. The death benefit in an annuity is also rather inconvenient in that in order to collect you must DIE. I don’t know about you, but that is one “benefit” that doesn’t benefit me. Now, of course, if you have loved ones that you want to provide for a death benefit may offer you some peace of mind. Keep in mind what you pay for that peace of mind and the likelihood of it ever being collected on. If you are insurable purchase insurance, if you are not, perhaps a variable annuity with a death benefit makes sense (though I still highly doubt it). If in the extremely rare circumstance that a death benefit makes sense in a variable annuity my choice would be to purchase a variable annuity from the Vanguard Group, they offer a low cost account with a death benefit.

Let’s recap the problems with Variable Annuities. High expense, high marketing costs, tax penalties if under 59 ½, loss of capital gains status, loss of step-up, limited choice of investment vehicles, & worthless death benefits. So why do people continue to be sold these products? High commissions and high profitability to the companies involved. Profit is the bottom line, not your interests. Variable annuities have become such a problem that the SEC (regulator) has issued a booklet available online through its website www.sec.gov. that lists the pros and cons of annuities. In addition they are in the process of taking legal action against several major companies and brokers over selling tax-deferred annuities to people whom already have tax deferred accounts.

Living Benefits

Variable Annuity providers knew that the death benefit just wasn’t enough to keep the sale of variable annuities going, so they came up with a whole new generation of benefits for variable annuity products dubbed Living Benefits. The four major living benefits that are offered are as follows:

Guaranteed Minimum Withdrawal Benefit (GMWB)

Guaranteed Minimum Withdrawal Benefit For Life

Guaranteed Minimum Income Benefit

Guaranteed Minimum Accumulation Benefit

These living benefits are sold with some really great stories and too good to be true promises. I can’t even begin to get into the inner workings of each of these so called benefits because it would bore you and take up a lot of space. Suffice it to say that these living benefits are expensive (despite what your broker will tell you) and are not all they are cracked up to be. If you are being told that you will be guaranteed 7% on your money, beware and read the small print. If you are being told that regardless of stock market performance you can withdrawal 7% of your account annually, beware. The stories that are used to sell these products are wonderful, they sound like an investors dream, but reality is much different. These products are costly and in most cases fixed against the possibility of a claim being made. Always read the fine print and hire a professional who has nothing to gain to review any variable annuities recommended to you.

The “Bonus” Annuity Scam…

If you are an annuity holder, chances are you have been approached by an insurance agent trying to sell you an annuity that pays you an ‘upfront’ bonus. Whatever you do, do not succumb to the sales pitch for the new “bonus” annuities. This is a new and highly aggressive tactic of the industry, to keep investors “imprisoned” in a high cost product, and generate new and even larger commissions for the sales force. Annuity holders with a few years left in their surrender charge period are approached with the following “typical” story:

“I understand that you are unhappy with your current variable annuity because of poor performance, lack of investment choices & a fading death benefit. I also understand that you have a surrender charge left. We are going to “help” by giving you an up-front “bonus” of 3-6% to cover the surrender charge. It will not cost you anything to switch.”

Unfortunately, the only “bonus” is to the salesperson. The new sale starts the surrender period all over again and the salesperson gets another commission. It is a great deal for the agents, they get two commissions from you.

To pay for the bonus and the commission and any extras, the insurance company raises the expenses on your investments. Since these expenses are buried in the prospectus and hidden from you on your statements, you never know that you are being taken advantage of. When all is said and done, everybody is making money except you! I have actually been in meetings and heard brokers laugh at how they duped another person into a “bonus” annuity. They refer to the extra commission internally as the “Yield to Broker.” It appears that the SEC is coming down hard on this practice. On June 5th, 2000, they issued an “investor alert” and placed a brochure on its website to help investors understand the benefits, costs, and risks of variable annuities, which combine features of mutual funds and insurance.

Insurance companies have been hit with rounds of lawsuits stemming from churning and suitability. It seems that the real “bonus” will be new business for trial lawyers!!!

Equity Indexed Annuities

These annuities are sold mostly by independent insurance agents, but I believe you will see more brokerage firms selling them in the future (along with banks). Equity Index Annuities or EIA’s have a great story to tell, typically it goes like this:

“Would you like an investment that pays gains based on the stock market, yet helps protect your principal when the market declines?”

Wow, market goes up I make money, market goes down I don’t lose money, where do I sign up? This latest derivative of the fixed annuity has grown in popularity over the past few years due to what appeared to most people to be a lackluster or falling market (not true), fear, and high commissions.

First, let’s be clear about what an Equity Indexed Annuity is, it is a fixed annuity. A fixed annuity that credits you interest that is based on some portion of an index’s return, typically the S & P 500. Your money is not invested in the stock market at any time and your returns will not be reflective of the stock market. Over time your returns will be similar to that of a fixed annuity, possibly a little better. However, you will be subjected to long surrender periods, excessive surrender charges (due to excessive commissions) and outright lies about the possible performance. Even though your returns are linked to a market index, the insurance company controls how the link is determined and has the ability to manipulate it so that the interest paid out is nowhere near what the market returns. In the real world there is no free lunch, you can’t experience the returns of the market without experiencing the risk. The insurance companies utilize many methods to ensure that your credited interest rates are not too high over the long term and in most cases the products are structured to benefits the companies and agents selling the products. It would be too lengthy to go into the inner workings of the index annuity here, but if you really want to talk about it give me a call, especially if someone is trying to pitch you one of these lame excuses for a financial product. The commissions and incentives linked to index annuity sales are a scandal much bigger than the Morgan Stanley settlement I spoke of earlier in this piece. While Morgan Stanley was fined $50 million for offering incentives to sell certain funds, insurance marketing companies do the same thing every day and get away with it. Trips to Monte Carlo, the Caribbean, and Mexico are everyday fare in the world of index annuity sales. What is motivating the sale of the index annuity, your best interest or a commission and a trip to the Caribbean?

Bank Insured Money Market Accounts

If you are a brokerage firm customer you may have noticed that over the past couple years the name of your money market fund has changed, or perhaps you didn’t notice. Most people haven’t noticed and that is what the brokerage world wants. As if the brokerage firms weren’t extracting enough income from you they devised a new way to make money on you, bank insured money market accounts. It used to be that you had a normal money market account that invested in short term investments and you received a pretty good return, though the fees were usually higher than say a Vanguard money fund. However, the brokerage firms decided that they using your money to support other entities borrowing habits didn’t make them much money, thus they devised a rather ingenious plan to use your money to support their one borrowing and lending habits. Basically your regular money market fund was replaced by a lower yielding money market fund that is touted to you as “bank insured.” This sounds good to you, insured money sounds better than uninsured money, but in reality the brokerage firms are now making money on your money twice. They make money by charging you an asset management fee to run the money market fund and secondly by directing your money into their own bank. Each brokerage firm sets up their own bank and the money that is deposited to the money market funds is lent to this bank as bank deposits that can be lent out to consumers and business, thus allowing the brokerage firm to earn another spread on your money. Perhaps this would be ok if it was truly disclosed to you and you could be guaranteed not to earn anything lower than a good institutional money market fund, but in reality your yield is much lower than say the yield at Vanguard, or even other money market funds offered by your brokerage firm. You get a new bank insured money market fund, a lower yield and the brokerage firm gets a new revenue source……does this sound like it is in your best interest?

Your Best Interest and the Merrill Lynch Rule – Brokerage Firms Fight Being Labeled a Fiduciary

I’ve spoke a lot about the conflicts of interests that exist at most brokerage firms and these conflicts stem from the fact that there is no requirement at a brokerage firm that your best interest be put first. This means your broker is not required to act as your fiduciary. A Fiduciary is someone who is required to place their client’s interest first, even above their own. Interestingly enough the brokerage firms have been fighting for years to avoid having to become fiduciaries despite the fact that they hold themselves out to be financial planners and advisors (who in most cases are required to be fiduciaries). The fight against being a fiduciary played itself out in what is now known as the Merrill Lynch rule. The Merrill Lynch Rule allows brokerage firms to offer advice for a fee without having to be fiduciaries. It is troubling how far the brokerage firms will go to ensure that they are not called fiduciaries. They are willing to fight because they know that they CANNOT honestly act as a fiduciary and continue to do business as they do now. Ask your broker if he/she is acting as your fiduciary and then get it in writing. Chances are they won’t put it in writing and they won’t put your best interest first.

Separate Accounts

Coming Soon

Active Management

Coming Soon

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