Wall Street Brokers missed the memo on Index Funds

"In recent years, investors have been flocking to low-cost index funds, driven by their long-term record of outperforming higher cost actively managed funds" writes Randall Smith in The Wall Street Journal (10/7/19). However, clients of Wall Street brokers have just 29% of assets in passive index funds according to a report by Cerulli Associates. The situation is even worse for clients of regional and independent firms with only 20-22% of assets invested in index funds. Who is getting rich? Certainly not the client who is paying high fees for funds that under perform their indexes. The benefits of index investing has been a major theme of this blog. Check out other posts that may convince you that your charming, persuasive broker may not have your best interests in mind.

How much are you paying your financial advisor? How much are they earning in commissions?

Now that the Trump administration has nixed the fiduciary standard which would have required financial advisors to hold the best interests of their retirement clients above their own pocketbooks. The Obama administration's Labor Department had proposed a rule that financial sales people/brokers/advisors who deal with retirement accounts and clients would have to follow a fiduciary standard whereby they would have to act in their client's best interests rather than selling the client a financial product that produced the highest commission.  Well forget that! Unless you work with a certified financial planner (CFP) or other professional who follows a fiduciary standard don't trust your "advisor" to do what is in your best interest.
Currently the Securities and Exchange Commission (SEC) chair is proposing a new ruling to protect consumers that would require brokers to disclose their sales incentives, sales contests and commissions.

"Most brokerage firms pay their employees more for selling certain products over others, depending on how lucrative they are. This can result in customers paying more for products and services than they need to, though brokers defend the practice as the only way to reasonably offer a range of investment options." ("Brokers fight to keep pay perks, by Gabriel T. Rubin. The Wall Street Journal, 12/26/18 p. B1.

Brokers Fight Rule to Favor Best Interests of Customers

If you think your broker or financial “advisor” has your best interests at heart, think again. “David O’Brien, a certified financial planner, has tried to repair the retirement portfolios of several victims over the years. There was the high school science teacher who didn’t realize she had been sold a variable annuity, where layers of incomprehensible fees devoured nearly 2.5 percent of her retirement savings each year. Then there was the woman fighting cancer, who was also sold a high-cost annuity, but whose underlying investments were tied up in a money-market type fund — one that cost 1.5 percent annually.”  “Brokers are not necessarily required to act in their customers’ best interest, even if they are advising on their retirement money. While that would seem to be a basic consumer protection, in Washington and on Wall Street it has proved to be wildly contentious.” Don’t deal with any financial professional who doesn’t have a fiduciary responsibility to put your interests first. Tara Siegel Bernard explains the details in the New York Times:  http://www.nytimes.com/2014/06/13/your-money/rule-to-make-brokers-act-in-clients-interest-still-pending-after-4-years.html?ref=your-money

Should you Trust your Broker or Adviser?

To what extent does your broker or financial adviser have your best interests in mind when they recommend financial products?  A University of Toronto researcher suggests you be very skeptical. "A study published in the February 2013 issue of the Journal of Finance has found that mutual funds offering higher broker fees attract the most investments." "It also found these payments are linked to lower investment performance, especially when the fees come from one-time sales loads rather than ongoing payments.  It is the first such study to explicitly show how broker fees affect investments into funds and how they subsequently perform." "Brokers are typically compensated in two ways. If the fund is a front-end load, the investor pays a one-time charge, taken immediately off the top of their initial investment as a predetermined percentage. The broker receives the bulk of that charge." "Investors may also not realize how much their brokers continue to receive out of their investments, via ongoing "trailer fees." So if your adviser recommends that you stay in a mediocre fund... maybe they are making lots of money off of you. Be skeptical and ask your broker/adviser how they are compensated and how much money they will make if you buy the fund they recommend. Better yet,work with a fee-only financial planner. Read more: http://www.eurekalert.org/pub_releases/2013-01/uotr-bff013013.php