Brokers Fight Rule to Favor Best Interests of Customers
nytimes.com
nytimes.com
“The real problem with revenue sharing is that it is an undisclosed, under-the-table payment from the broker to the adviser,” said Professor Bullard, though he noted that not all arrangements were conflict-ridden.
The divergent standards between those - like me - who serve companies and sophisticated investors, and those who serve unsophisticated Main Street clients is startling. To me, it would be preposterous to not be fiduciarilly bound to a retained client. But apparently this is business-as-usual for retirement advisors. Similarly, I face liability if I do not disclose any related fees or payments to all parties following a transaction. But retail financial advisors see those agreements as trade secrets.
There may be a good argument for obscuring this information from unsophisticated parties. I think the abundance of information available to be mis-interpreted by unsophisticated retail investors is part of the problem. But I haven't heard the brokers articulate it.
As for fiduciary obligation, I cannot understand the present situation. But I also believe that banks should be partnerships, where at the end of the capital structure are the partners' personal assets. Perhaps I'm just old world.
I really hope they push this rule through - it's in the best interests of so many hard-working Americans. Who cares if a few sharks have to starve? Maybe they can go sell used cars.
I would want an investment advisor to earn a fixed dollar amount per quarter, regardless of assets under management. A generous bonus would be given for a fraction of returns above a benchmark. A stiff penalty would be assessed for exceeding loss (e.g. you shouldn't lose more than 10% in any given year) or liquidity (e.g. you should be able to withdraw $50 000 with 2 weeks' notice without impairing your assets' values by more than 2%). Half of any commissions paid to third parties would be deducted from the advisor's fees. Any incentive payments offered by fund managers would be split, 50/50, between the advisor and the client (e.g. as fee waiver).
Mind elaborating on this? Why don't you need to disclose related fees and payments _before_ the transaction (so that other parties can enter any deal with knowledge of potential conflicts)?
No one would bat an eye if a used car salesman put his own personal interest above the interest of his customer? Why should we then be outraged when someone sells you an annuity that isn't the ideal product for you? If it is my responsibility to educate myself enough that I don't spend an extra grand when the dealer recommends they undercoat my new car, why shouldn't I have to educate myself on why I shoudn't purchase an annuity in my new IRA?
The problem with this argument is that it devolves into:
1. Requring that everyone knows everything about everything (total knowledge)
2. It being acceptable to take advantage of anyone who doesn't do #1
I see this argument as a trust issue. I'd prefer to live in a society free from kickbacks and money passed under the table, and arguing for it is the first step to even worse corruption.
Personally, I'd love for it to be self regulating - for example, the "You break the candy bar in half, I get to pick which piece I get, and you get the other" model, where the best action for the breaker is to make a perfect 50/50 cut. I'd love for honesty to be the best policy for all involved parties.
That could be because they expect used car salesmen to behave unethically. In that case, their "not batting an eye" would indicate that they don't feel a responsibility to address this injustice, not that the act under consideration is perfectly just by their standards.
> Why should we then be outraged when someone sells you an annuity that isn't the ideal product for you?
Because it strikes us as violating our ethical principles. From my perspective, business should be about providing value for the customer. Taking advantage of people to get their money is terrible, and I would think less of anyone (car salesman or financial planner) who did so.
A good salesman persuades customers to take action that is beneficial to both parties.
Do you really expect bankers to act ethically?
The financial "adviser" (what a misleading name!) pushes you to buy the worst quality product, and this is not generally understood. They encourage this confusion by present themselves as being more like lawyers or accountants than salesmen.
Nope. The car salesman pushes you to buy the car with the highest profit margin that fits (or is slightly above) your budget.
I found out somebody talked by parents into a variable rate annuity. The worst of the worst. Guess who it was? My cousin.
The fund he had me in was terrible. An expense ratio of something like 1.5%, a maxed-out 12b1 fee and a front-load sales charge of 5.25%. At least it wasn't an annuity.
Once I graduated and got my first full-time job, I started reading over the 401k material and doing my own research which lead me to the Boglehead's site. I slowly began the realize the fraud my friend had pulled over me.
When I presented him with the evidence, he literally lied to my face. That or he had so completely swallowed Primerica's literature that he believed himself. He tried to tell me that their fund had outperformed the market (it had not) and had stayed stable through the 2008 crash (it had not, it lost far more than the market).
He tried to convince me that the fees were actually quite low compared to the average (obviously not) and that Vanguard was in fact more expensive.
I ordered him to transfer the entire account over to Vanguard and we haven't spoken since.
(Another unspoken advantage of Vanguard or Schwab: if they do something I don't like, I can safely pull my business without risking a personal relationship)
All really good salesmen temporarily believe
whatever bullshit they are selling at the time.
It's kind of like method acting.A good version of this comment would teach us something about how sales really works, while being polite.
Interestingly the UK is relaxing the requirement to buy an annuity when your DC (defined contribution) Pension matures.
http://webapps.dol.gov/FederalRegister/HtmlDisplay.aspx?DocI...
is the actual link. I believe that a rule change will save many small investors from being fleeced, but attempting to read this proposed change also made my brain hurt.
Result, lots of the advisors have shut down, as that was their main income.
Difficult to say, whether no advice is better than biased advise! My gut feeling is yes. Forces us to think for ourselves.
Of course no one wants to do this because the industry doesn't want to stop ripping people off and "progressives" and "liberals" don't want to admit that the "the high school science teacher who didn’t realize she had been sold a variable annuity" has agency and shouldn't have been buying a product that she didn't understand and which a quick google search should have quickly warned her about.
Because we live in a civilization.
A better example is this:
Someone goes into a used car lot and explains to the dealer that they live in a cold climate with lots of snow, have three kids, and go camping a lot. They explain that they need a car with lots of cargo room, is reliable, cheap to maintain, and which is good in icy conditions.
The dealer proceeds to talk the buyer into buying a 20 year old porsche 911. It doesn't satisfy any of the stated needs and costs the buyer money that they didn't need to spend. The dealer's actions were clearly unethical. But, should they be illegal? Thats a very complex question and not one that can be answered by "MOAR REGULATION!" demands.
If the dealer lied about the car while selling it, then in theory the buyer can successfully sue for damages. In practice it's likely to be hard to prove.