What's the Problem with Broker Advice? It's not Advice.

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Rick Ferri
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What's the Problem with Broker Advice? It's not Advice.

Post by Rick Ferri »

I was reading about a service provided by TD Ameritrade and it reminded me that brokers do not give unbiased advice. They sell.

Discount brokerage firms such as Schwab and TD Ameritrade will refer you to an independent investment adviser if you request one. This may sound like an unbiased referral, but it is not. What you don't know is how these firms are chosen for the programs and how the adviser's fee plays into that decision.

A few years ago, when I was managing money directly for clients, I looked into receiving referrals from Schwab and TD. I completed the application process and had an interview. Both firms rejected me; not because I didn't qualify professionally, but because I didn't charge enough money. How can this be? Why would I be rejected for the program because I didn't charge enough?

Buried deep in the fine print of THIS AD is this disclosure:
RIAs will pay TD Ameritrade fees for their participation in the AdvisorDirect program. Those fees will usually constitute a percentage of the advisory fees you will pay your RIA.
I was rejected because the brokerage firm was to receive a percentage of the fee I received from each client and neither Schwab nor TD had any interest in an adviser who charged low fees when the average adviser in the program was charging 1.0%. Even though referring to a low-fee adviser is the best thing for their client, remember that brokers are not in business to do the best thing for clients.

Brokers are not fiduciaries. If a comparable low fee fund or service is available, they don't have to tell you about it. The can recommend the high fee fund or service as long as it is "suitable" for your needs. This is why getting investment "advice" from Schwab or TD or any brokerage firm isn't trustworthy. There's an ulterior motive to their recommendations. You can do better most of the time.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
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nedsaid
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Re: What's the Problem with Broker Advice? It's not Advice.

Post by nedsaid »

Rick, this is interesting. Good to know that "objective" advice isn't always objective.
A fool and his money are good for business.
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Re: What's the Problem with Broker Advice? It's not Advice.

Post by Fallible »

Rick Ferri wrote: Sun Oct 28, 2018 8:03 am I was reading about a service provided by TD Ameritrade and it reminded me that brokers do not give unbiased advice. They sell.

Discount brokerage firms such as Schwab and TD Ameritrade will refer you to an independent investment adviser if you request one. This may sound like an unbiased referral, but it is not. What you don't know is how these firms are chosen for the programs and how the adviser's fee plays into that decision. ...
And what we don't know can hurt us.

Thanks for this, Rick. It clearly shows we may not know how fees play into their decisions, but we can assume they do and that it is to the broker's advantage, not the client's.
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
Ron Scott
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Re: What's the Problem with Broker Advice? It's not Advice.

Post by Ron Scott »

AYCO, a Goldman sub, provides financial advice for executives of their corporate clients and other individuals, typical higher net worth.

Here's a section from their disclosures:

Under certain of Ayco’s financial counseling programs, Ayco may recommend securities or investment products, including those offered by its affiliates. This could lead to conflicts of interest of which you should be aware. Ayco is part of Goldman Sachs, a worldwide, full-service investment banking, broker-dealer, asset management and financial services organization. The Goldman Sachs Group, Inc., Ayco, and their affiliates and employees (collectively, “Goldman Sachs”) are engaged in businesses and have interests other than providing financial counseling services to individuals. This includes the management and sale of investment funds and other financial products that may be recommended to counseled individuals, and investment activities and business operations that may affect such funds or products. Goldman Sachs, Ayco and its counselors may receive various forms of compensation, commissions, payments, rebates and services related to sponsoring, managing or selling investment products recommended to counseled individuals. This may incentivize Ayco or its affiliates and their employees to recommend such products over others which might also be appropriate for counseled individuals. Goldman Sachs’ arrangements with outside managers may differ, and currently Goldman Sachs, Ayco and its counselors receive greater compensation for accounts managed by Goldman Sachs affiliates than in connection with separate accounts managed by non-Goldman Sachs entities.

Ayco or its affiliates may engage in insurance consulting or the insurance agency business for purposes of offering insurance contracts to counseled individuals, including variable life insurance contracts for which Ayco or its counselors may receive various forms of compensation. In addition, investment advisors of investment funds and products that may be offered to counseled individuals also may have other clients, businesses, and interests in addition to managing the assets of such product. Present and future activities of Goldman Sachs and other advisers in addition to those described in this supplement may give rise to additional conflicts of interest.
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Re: What's the Problem with Broker Advice? It's not Advice.

Post by Rick Ferri »

As long as the conflicts of interest are disclosed, they are not an issue with regulators. But I wonder how many people actually read the fine print.
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Re: What's the Problem with Broker Advice? It's not Advice.

Post by goblue100 »

My suspicion is that the old model of doing business is in the process of falling apart as we speak. They could get away with it in the old days, because people just thought that is how it was and they didn't know any better. Now, with information being spread by the internet in posts such as these there are fewer and fewer people who will put with high fees and biased advice.
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Re: What's the Problem with Broker Advice? It's not Advice.

Post by Ron Scott »

goblue100 wrote: Mon Oct 29, 2018 7:54 am My suspicion is that the old model of doing business is in the process of falling apart as we speak. They could get away with it in the old days, because people just thought that is how it was and they didn't know any better. Now, with information being spread by the internet in posts such as these there are fewer and fewer people who will put with high fees and biased advice.
Rick Ferri wrote: Mon Oct 29, 2018 6:42 am As long as the conflicts of interest are disclosed, they are not an issue with regulators. But I wonder how many people actually read the fine print.
I read the CoI statement and I had a strange session with my AYCO advisors afterwards during which I had my WTF face on and they sat straightfaced. My question: "So how am I supposed to know what to do?"

I eventually left the advisory and was transferred to Goldman. Left them for good a year or so later, basically because I wasn't listening to any of their advice, and ended up in VG.

VG seems to have their own take on markets and investing, which I don't pay much attention to, but is very good with addressing technical issues and working with my tax accountant.

If there's a need on the part of most savers and retirees for a financial advisor beyond technical issues I don't see it. It's pretty easy to assemble some version of a 2-fund portfolio + a back-up cash account. Maybe they can help some people with things like Roth conversions, asset location, drawdown strategies, etc., but not actual investing.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.
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Re: What's the Problem with Broker Advice? It's not Advice.

Post by ROIGuy »

Rick Ferri wrote: Mon Oct 29, 2018 6:42 am As long as the conflicts of interest are disclosed, they are not an issue with regulators. But I wonder how many people actually read the fine print.
The same amount of people that read their car lease or car loan contract.
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Re: What's the Problem with Broker Advice? It's not Advice.

Post by Alexa9 »

It's the investor's job to research the best method like any other part of life. The internet makes it easier than ever to figure it out on your own and DIY. If someone gets sucked into high fees, it's their own fault. This doesn't diminish reasonable and affordable hourly fee only financial planning. High net worth people seem to think that investing is like luxury products and that you get more if you pay more, but that's been shown to be hardly the case.
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Re: What's the Problem with Broker Advice? It's not Advice.

Post by rich126 »

I have a bunch of money with TD partly due to their acquisitions of ThinkOrSwim and Scottrade. I don't use any of the "advice" services.

I had a guy from the local office call me several times until I told him off and made it clear that for better or worse, I do my own investing and don't wish to be bothered. I did get 10 free trades from the complaint.

This is a bit off topic but it just seems like so much of the economy is based on people trying to do fraudulent, scams, etc. things. I hate seeing people taking advantage of but I guess it has been going on for centuries.
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Re: What's the Problem with Broker Advice? It's not Advice.

Post by nedsaid »

Rick Ferri wrote: Mon Oct 29, 2018 6:42 am As long as the conflicts of interest are disclosed, they are not an issue with regulators. But I wonder how many people actually read the fine print.
The bold print giveth, the fine print taketh away.
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Re: What's the Problem with Broker Advice? It's not Advice.

Post by Taylor Larimore »

Brokers are not fiduciaries. If a comparable low fee fund or service is available, they don't have to tell you about it. The can recommend the high fee fund or service as long as it is "suitable" for your needs. This is why getting investment "advice" from Schwab or TD or any brokerage firm isn't trustworthy. There's an ulterior motive to their recommendations. You can do better most of the time.
Rick:

The Financial Industry recently won their hard-fought battle against the Fiduciary Rule that would have required brokers and advisors to act in their clients' best interests.

Author Bill Bernstein put it this way:
Act as if every broker, insurance salesman, mutual fund salesperson, and financial advisor you encounter is a hardened criminal, and stick to low-cost index funds, and you'll do just fine.
Thank you for your timely warning.

Best wishes.
Taylor
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Re: What's the Problem with Broker Advice? It's not Advice.

Post by aspirit »

My hat's off to you again Rick!

I recall your move selling your operation.
My suspicion was that your operations business model and fees structure was viewed as threatening to other behemoth sized brokerage operations higher fee's and such.
So they* purchased the Portfolio solutions unable to keep you inline.

That "fiduciary" STOCKact has become whittled down also, https://www.npr.org/sections/itsallpoli ... rading-law it has no teeth!

You cannot buy a reputation, as you well know.

Good luck!
Time & tides wait for no one. A man has to know his limitations. | "Give me control of a nation's money and I care not who makes it's laws" | — Mayer Amschel Bauer Rothschild ~
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Re: What's the Problem with Broker Advice? It's not Advice.

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aspirit wrote: Mon Oct 29, 2018 9:45 am My hat's off to you again Rick!

I recall your move selling your operation.
My suspicion was that your operations business model and fees structure was viewed as threatening to other behemoth sized brokerage operations higher fee's and such.
So they* purchased the Portfolio solutions unable to keep you inline.
No, that's not how it went down. But good guess!

Rick Ferri
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Re: What's the Problem with Broker Advice? It's not Advice.

Post by Fallible »

Rick Ferri wrote: Mon Oct 29, 2018 6:42 am As long as the conflicts of interest are disclosed, they are not an issue with regulators. But I wonder how many people actually read the fine print.
And not just read the fine print, but understand it, and if they don't understand it, ask questions (if they can find the right person to ask and if that person explains it honestly, fully, and in terms they can understand).
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
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Re: What's the Problem with Broker Advice? It's not Advice.

Post by willthrill81 »

Sadly, I believe strongly that the mantra "If you have the ability to properly evaluate your financial adviser, you probably don't need one" is spot on.
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Re: What's the Problem with Broker Advice? It's not Advice.

Post by aspirit »

Rick Ferri wrote: Mon Oct 29, 2018 10:01 am
aspirit wrote: Mon Oct 29, 2018 9:45 am My hat's off to you again Rick!

I recall your move selling your operation.
My suspicion was that your operations business model and fees structure was viewed as threatening to other behemoth sized brokerage operations higher fee's and such.
So they* purchased the Portfolio solutions unable to keep you inline.
No, that's not how it went down. But good guess!

Rick Ferri
O' Well. My hat's still off to you Rick. As I mentioned, it was my suspicion. I suppose I could research some of your older posts, but that would be for another day when I've time. My experience in business has been lower prices usually attract customers and customers concerns are paramount.
So someone or a consortium of interests bought you out, again, I'd suspect. I just recall you sold PS and went around the USA w/a trailer in tow. http://50-50.us/category/history/ That must have been great!
Thats it.

Unless i'm mistaken again, I'm under the impression you had been planning a comeback in the business arena of finance sooner than later. Your sale might have had a non-compete clause, I'm not sure. My memories not what it once was. Your straight talk has always been impressive.

Anyway!

:happy You have my best wishes Rick, and Good Luck to you too!
Time & tides wait for no one. A man has to know his limitations. | "Give me control of a nation's money and I care not who makes it's laws" | — Mayer Amschel Bauer Rothschild ~
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