The financial industry is in a state of flux, scrambling to adjust to the new normal thrust upon it by COVID-19. Most financial representatives are still working from home, talking to clients by video chat rather than the age-old norm of face-to-face, wondering if this is the way things will be from now on. Where’s it going? What does it mean? What’s the future of the financial world?
This is a time to ask questions. How will all this affect your investments, your retirement, your relationship with your financial person? In short—how will it affect your future?
I recently spoke with a friend who works for one of the large Wall Street brokerage firms. He expressed the concerns of a lot of his financial brothers and sisters. “I’m working from home, covering most of my expenses and the company is still paying me the same as before. Why wouldn’t I go independent, pay my own expenses and get a payout three times higher? Yep, I think going independent is in my future soon.” This thought process is only partially right and demonstrates the mindset of so many in this business. It puts the needs and desires of the broker (higher payout) ahead of the client.
Independence in and of itself will not resolve the conflict a broker working for a big Wall Street firm faces. An independent broker is still a broker. If there is a substantial exodus from the national and large regional brokerage firms, one hopes that the representatives will choose what is right for them and their clients rather than just what is best for their personal bottom line. That means shifting from the dual registered (broker and adviser) but still conflicted model to a fiduciary model, acting only as an investment adviser, in the best interest of their client, all the time.
Brokerage firms claim their representatives put the client first but while that may be true sometimes, it certainly isn’t all the time. The new Customer Relationship Summary, part of Regulation Best Interest passed last year, is a monument to the futility of trying to force brokers to adhere to a fiduciary duty. This document will end up being just one more document in the blizzard firms generate to open a new account. And it still doesn’t do what needs to be done – namely require anyone holding themselves out as an adviser to adhere to a fiduciary duty. Frankly, I don’t see how a broker of investment products could ever adhere to such a standard. A man (or woman) cannot serve two masters.
Brokers get paid to produce revenue for their employers. Those employers utilize a grid system where the more revenue a broker generates the more his share of the spoils. And if you produce too little revenue your pay drops or, in a worst-case scenario, you find yourself looking for a new job, career or firm. Success at the big Wall Street firms is measured in only one way – how much commission did you generate? It has nothing to do with the quality of your advice. There is constant pressure to produce and the easiest, quickest way to do so is to sell commission-generating financial products.
Anyone who has worked for a big brokerage firm knows what happens when you get near the end of the production month. That’s when brokers start looking at their total revenue for the month and start calculating their cut versus their bills. If they’re coming up short, the easiest way to make up the difference is to find some commission-based product with a good story to sell and get on the phone to your marks…er, clients. If you work with a big brokerage firm and you get a call from your broker near the end of the month, your best option is probably to let it go to voicemail. If you dare to answer, caveat emptor because you’re about to get sold something.
TD Ameritrade just released its latest survey about the trend of brokers leaving wirehouses and going independent. 36% want to move to get higher compensation, 35% want more control of their business, 14% want the freedom to work with clients as the broker prefers, 10% want the freedom to select the best investments for their clients and 5% want a better quality of life. Those are all legitimate reasons to want to leave a big brokerage firm, but you might notice that only 10% cited a client-centric reason for moving.
The real problem with Wall Street’s hybrid business model is that most representatives are dual registered. They are brokers sometimes and investment advisers sometimes. And, Regulation Best Interest notwithstanding, they aren’t going to volunteer which hat they are wearing today. The big investment banks need this model because the brokers are their sales force. Brokers sell the financial goods – stocks, bonds, funds, etc. – produced by the bankers. And they get paid handsomely for doing so. The investment bank’s fiduciary duty isn’t to the people buying those products but rather to the companies selling them.
With all the turmoil in the investment industry you may well hear from your representative sometime soon with the news that they are “going independent”. If they do, it is a great time to ask some questions:
- Will you be dual registered or working solely as an investment adviser?
- How will you be compensated? Will you earn commissions on the financial products you buy on my behalf?
- Will you also be licensed to sell insurance? If so, what companies will you represent and why? How will you be compensated?
- How will you vet the investment products (mutual funds, ETFs, managed accounts, etc.) you use to invest my funds? Are the costs considered?
- Will your new firm also act as custodian of my funds? Or will you use independent, third-party custodians? If yes, which ones are available to me?
- What investment strategies will you employ to invest my assets?
- Will you pursue a passive or active approach to managing my portfolio? If active, how will that be accomplished?
- Who will act as your regulator? The state or the SEC? FINRA?
- Do you have a succession plan? What happens if you get hit by a bus?
- Will you have an office or will you work from home? If the latter, will all our interactions be remote? If we meet face to face, where will we do that?
That is far from a complete list but it is certainly a good start.
All of those questions are important but the most important is whether your adviser will be working under a fiduciary standard. A fiduciary is someone who is legally and ethically required to put your best interest ahead of their own. It’s about you, not about them, every time no matter what.
Take advantage of this time to review your financial situation and the people who are part of it. Be prepared to make changes. To use an old football philosophy, find out where the goalposts are and head for the end zone.