Category Archives: Secrets of Wirehouse

Wells Fargo Institutionalizes Fraud – Gets Slapped On Wrist

When was the last time you heard of a company firing over 5,000 employees due to fraud? My answer is never. I’ve never heard of a company firing 2% of their workforce and citing fraud. Outside of a recession or a merger, a company announcing they are firing 5,000 employees is rare. If I had to give you one guess what industry such a company came from I’m willing to bet you’d guess the financial services industry…and you’d be right. Continue reading Wells Fargo Institutionalizes Fraud – Gets Slapped On Wrist


Secrets of the Wirehouse: Self Regulatory Bodies Favor…Themselves

Most consumers don’t know that there are two primary regulators for financial advisors. Further, most don’t know that one of those bodies is not governmental, but a self-regulatory body.

Advisors who charge fees are generally regulated by the Securities and Exchange Commission, a government regulator, but “Advisors” who earn a living by selling products (receive commissions in exchange for selling mutual funds and variable annuities) are regulated by an entity known as FINRA, the Financial Industry Regulatory Authority, which is a self-regulatory body.

Continue reading Secrets of the Wirehouse: Self Regulatory Bodies Favor…Themselves


Secrets of the Wirehouse: Variable Annuity Trickery

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Today I received an e-mail from a large variable annuity distributing insurance company that reminded me of a trick these companies use to get more money into their products. The trick has been around for decades and is completely legal, just misleading.

Here is how it works, as explained by the insurance company:

This allows clients to earn 6% on money in our DCA Bucket. (Fees are not assessed on money in the DCA bucket)

Each month we transfer 1/6th of the money into the investments that you select.

The client only sees the fat 6% yield. In their mind if they put $100,000 into this product they will earn 6%. But they will not, not even close. Instead of earning $6,000 on their investment (6% of $100,000) they will only earn $1,779.

The way the trickery works is the interest rate is applied to smaller and smaller balance, the insurance company only pays an annualized 6% rate on the full deposit for one month (the first).

Most people don’t understand annualized rates, they see 6% and think they will earn 6%, but in reality they are set to earn .5% on the balance in the account, a balance that is getting smaller by 1/6th every month.

At the end of 6 months their money has been fully transferred into a variable annuity sub-account where they are likely paying 3% in annual fees. I created a spreadsheet below to demonstrate how it works.

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It’s clear that no one is earning 6% or what a regular person would perceive as 6%. They aren’t even earning 6% on their balance for six months (which would be $3,000). At the end of the 6 months they’ve accumulated about $1,779 in earnings (and this assumes compounding interest), but since the money they transferred to sub-accounts is paying 3% in fees, those earnings are reduced by about $623. The net interest earned is $1,156, a far cry from $6,000.

Now, getting over a thousand dollars in interest on your cash is nice in an age of zero interest rates, but the point is that this “feature” is used in order to get you into an expensive product under false pretenses.

Scott Dauenhauer, CFP, MPAS, AIF


Secrets of the Wirehouse: Garden Leave Skirts Laws

I learned a new term recently, Garden Leave. It’s a term associated with a brokerage firm so it struck me as odd that I didn’t know what it meant, turns out it’s relatively new and yet another Secret of the Wirehouse.

Why anyone would remain working at a brokerage firm is beyond me, they are controlling, manipulative organizations that have only their own interest in mind (not that of the broker or the client). Garden leave policy is just another example of behavior that a fiduciary would never put up with.

Every year hundreds of brokers switch firms. When they do this they attempt to bring the client base they’ve built with them.  Brokerage firms don’t want their brokers to leave and so place barriers in their way (as opposed to providing the best possible work environment) to lower the probability they’ll be able to retain the book of business. In my last post I discussed how Merrill Lynch is considering requiring older brokers to team up with newer brokers, they are doing this so that the newer broker forms a relationship with the older broker’s clients and can hopefully retain those clients if the older broker leaves. Garden leave is the next barrier a brokerage firm will use and a recent report suggest Merrill is looking to add this potentially illegal policy to their arsenal.

Garden leave is when a broker leaves a brokerage firm and attempts to bring his/her clients with them to the new firm, the brokerage firm being left uses an employment manipulation to prevent the broker from soliciting their client base.  In a recent story on AdvisorHub, it was described this way:

Just as a little background, it’s a slang term for period of time off you are required to take before you leave your current firm and start to work for your new firm.  You may also see it written as “gardening leave”.  Why call it that?  As the name implies, it means you have plenty of time to work on your garden at home before you can start your next job.  

It is just an amount of advance notice you AGREE to give your current employer before starting work at another firm.  Although new to advisers at the big wirehouses, it has been a common feature in home office and field management positions for some time.  Generally the higher or more sensitive the position, the longer notice required. Ever wonder why your branch/complex manager disappeared but didn’t show up at another firm for about 90 days?  Gardening Leave.  Why did senior executives going from one firm to another in the last several years not show up at the new firm right away? Gardening Leave. 

Keep in mind most states won’t let an employer say you must be unemployed for 30, 60, 90 days.  Right to Work laws take care of a lot of that.  So what happens is you submit your resignation, the firm says, “Thanks for the heads up; You can go home for 30/60/90 days and we’ll keep paying your salary. You are prohibited from contacting anyone at work or engaging in any work activities.  Enjoy your time off.”  Then they will cut off your access to everything.  But they won’t terminate you because if they do that, then you generally have the right to seek immediate employment.  

So your first problem is other advisers contacting your clients with no contact from you to rebut anything they say. But I think the bigger problem, and from all the notes on here it seems Mother Merrill is getting real good at this, is they may have up to 90 days to comb through everything you have done looking for something to tag your U-5 with and you won’t even be around to defend yourself. At that point Merrill could even announce they intend stay in the recruiting protocol and it just won’t matter.  So what if you can leave with a list of clients you have not been allowed to speak with for 90 days?

If Merrill pulls this off, it will be a GAME CHANGER in recruiting and retention.”

This policy is a clear way to circumvent the law and destroy the book of business a broker has developed as well as an attempt at destroying the broker’s life. Without getting into the ethics of who owns the client, this policy strikes me as complying with the technical details of the law, but not the spirit. It seems to me this will be taken up by the courts, but it needs a law change. There is a trend of brokers leaving their firms to start fiduciary based firms and companies like Merrill are attempting to prevent such moves, which ultimately leads to more people not under a fiduciary standard.

Scott Dauenhauer, CFP, MPAS, AIF


Secrets of the Wirehouse: Compensation Manipulation & Garden Leave

Merrill PicEvery year the big brokerage firms (and the little ones to) announce an updated compensation plan for their brokers. This annual exercise is waited on with baited breath as the firm’s army of brokers will find out how their owners (er, bosses) want them to structure there business. The compensation grid is designed to manipulate the brokers into selling what the firm wants sold and structuring their business in a manner that will benefit the firm. Lately, Merrill Lynch (and others) have begun implementing policies that are designed to handcuff the brokers and make it nearly impossible to work in their clients best interest (as if that was ever a goal).

The first policy change is with how Merrill wants their brokers to structure their business. Mother Merrill wants brokers to “partner” up.  In an article on AdvsiorHub it was recently reported that brokers who don’t partner with another broker (normally an experienced broker with a new broker) will see their compensation cut. AdvisorHub reports in an unsourced quote, the following:

“Merrill Lynch is punishing its sole practitioners in an effort to keep their clients. This is another method of retaining the client at the expense of the advisor. Merrill is set to reduce compensation for non-partnering advisors over the next 18 months. The firm has a big initiative to get these seasoned advisors to take on a trainee because the firm has a great record of keeping trainees. Why not? They drink the Kool-Aid. They all believe Merrill Lynch is the best and are less likely to leave the firm.  This way, if a seasoned advisor leaves to take a paycheck elsewhere (and achieve greater autonomy), then the trainee has immediate shot at retaining any clients.”

So if you are a happy sole practitioner at Merrill and you don’t partner with a younger, newer Merrill broker, you could see your compensation go down. Mind you that partnering with a newly broker might not be good for your business or your clients or the fact that you might not need to partner up as you are doing a fine job on your own, Merrill has commanded it and you must obey.

This policy has one goal, to retain the Merrill broker’s clients if they ever leave the firm. Yet another conflict of being at a wirehouse. It boggles the mind why anyone would work for any of these big brokerage firms.

Think twice before working with a broker.

Scott Dauenhauer, CFP, MPAS, AIF


The Meridian Blog Bogus Takedown

george-orwell-truth-quoteMy website just came back online after being down since last Friday, why? An overzealous annuity sales company and a hosting company that has an utter disdain for their clients.

What started out as a small pain in the rear, has turned into a huge waste of time and resources at an extremely inopportune time given the volatility in the markets.

In December of last year I made a post that brought to light an industry practice of incentivizing insurance sales agents with trips to fancy places (Italy) and Visa gift cards for selling certain products. The offending company, The Annuity Store, had sent me an e-mail, unsolicited mind you, and I simply posted it informing the public of what is going on behind the scenes when they are being sold something.

Eight months later my website is shut down because The Annuity Store filed a DMCA Copyright complaint against me for posting the e-mail they sent me. Posting an unsolicited e-mail to draw attention to a practice the public should be aware of is protected speech. I responded to my host provider – Go Daddy – and even filed a counter-compliant. Go Daddy still shut down my entire website for parts of four days cutting off one of my primary vehicles for interacting with the public and clients. Go Daddy did this despite having no evidence that I actually violated any copyright.

It turns out that Go Daddy is famous for this, or rather “infamous” as this article relates. Go Daddy simply shuts you down with no due process. The Annuity Store new they didn’t have a legal case, so they tried to stop the information from getting out by using a backdoor, hoping that I’d just remove the content instead of fighting it. They’ve obviously not spent much time researching who I am.

I finally got my service restored this morning, though I’m not entirely sure why. I was told just minutes before it was restored that it would be 10 – 14 days. Then a few minutes later I got an e-mail saying the complaining party withdrew their complaint…

I’ll be changing hosting companies for sure and working to continue to expose the insurance industry.

Scott Dauenhauer, CFP, MPAS, AIF


Secrets of the Wirehouse: (Not So) Hidden Profit Centers

Broker-Dealers do not have client interests in mind, it’s just not possible given where they are their income. This articles details some of those profit centers and how they use them (hint: very little transparency).

3 Hidden Broker-Dealer Profit Centers Exposed