Wall Street’s Dirty Secret

March 5, 2010

The New York Times ran a must-read article this week on the important differences between brokers and investment advisors. As I have written in the past, the difference between brokers, or self-labeled “financial advisors” who work for big brokerage houses, and registered investment advisors is stark. Brokers are held to a suitability standard whereas investment advisors are held to a fiduciary standard.

The suitability standard is the great enabler of Wall Street. Securities distribution is the primary motivation of the brokerage industry. Brokers don’t get paid for providing you with objective financial advice. They get paid for hawking their firm’s latest offerings or pushing clients into the funds that pay the highest kickbacks. Despite the billions spent annually to convince you otherwise, brokers are securities salesmen-not financial advisors. As one former Merrill Lynch broker told The New York Times, “The amount of training I sat through to properly evaluate investment opportunities was almost nonexistent relative to the training I got on how to sell them.”

In contrast to the suitability standard, the fiduciary standard requires investment advisors to put their clients’ interests first. So by example, if an advisor comes across two otherwise identical S&P 500 index funds, but one has an expense ratio of 0.20% and the other has an expense ratio of 0.80%, the investment advisor would recommend the fund with the lower expense ratio. A broker could pick the fund that pays him the highest fees since both funds are identical from a suitability perspective.

My family-run investment company is a registered investment advisor. We are held to a fiduciary standard. We do not receive commissions, 12b-1 fees, or sales loads. We are compensated based on a percentage of the assets we manage. Our interests are directly aligned with the success of our clients’ portfolios.

If you currently seek outside counsel to help manage your investment portfolio, I would strongly advise you to consider an investment advisor held to a fiduciary standard.