In today’s hearing with the Subcommittee on Financial Services, Dina Isola lays out in five minutes (starting at about the 20 minute mark) the ways in which the system motivates our trusted financial advisers to look out for their own interests over those of their clients. I have personally experienced everything she is talking about when consulting with the custodian of our 401(k). I researched each one of the thirty choices available from the custodian (in this case, Merrill Lynch, but all custodians operate the same way). The offered funds tend to be lower quality and higher priced than funds available on the open market. No matter how much I pressed to adviser to explain why these funds and not those other funds, I got no answer. Eventually he shut down the conversation by telling me I should simply trust the experts. Then as he was showing me the door, I insisted that the experts should be able to explain their reasons. I could choose the self-directed option, but Merrill Lynch will charge a pretty penny for the privilege. Another Merrill Lynch adviser, probably unwittingly, hinted that the mutual finds in the plan paid Merrill Lynch to offer those funds.
From Ms. Isola’s testimony:
The brokerage business model, with all of these and other perverse incentives, is set up to pit broker against client. These incentives reward bad advice that harms investors. What's truly shocking is that brokers are allowed to engage in harmful conflicts of interest all while leading investors and policymakers to believe they are "trusted financial advisors" who will do what’s best for investors.
Let us count the ways:
1) Monthly sales quotas
2) Prizes for sales production
3) Product-specific pushes “with mutual fund companies paying to be included on the firm's recommended list.”
4) Selling in-house products even though “many of the firm's products were inferior to available alternatives”
After going into private practice, Ms. Isola has specialized in helping teachers.
They want need, and expect that they are getting advice that puts their interests first, not sales recommendations that will enrich the financial professional at their expense. Instead, they are typically sold high-cost, low-quality investments that tie up their money for years. In fact 76% of assets in non-ERISA 403(b) plans are in annuities - this despite the fact that both the SEC and FINRA have warned investors that these products can be extremely complex, have high costs, and may not provide meaningful value to them. What they do provide are huge commissions to the financial professionals and firms selling them.
Financial advisers move the savings of their clients into their own pockets.
We also worked with our son's former teacher, who barely understood what the S&P 500 is, but who was sold a complicated alternative mutual fund that had exposure to a variety of different complex derivatives and employed hedge fund strategies. Annual fund fees were just under 2%and every paycheck contribution was hit with a 3.75% sales charge, making it pretty impossible to earn a positive return after inflation.
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I could go on and on.
Remember, the financial adviser works for the firm that hired them, NOT for you.
Countless investors have no idea they are being harmed by their "trusted advisor" and that they would be so much better off if they received advice not tainted by conflicts of interest.
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Professionals referring to themselves as trusted advisors or providing what anyone would reasonably believe is investment advice must be willing to deliver on that implied promise, and put investors' needs first. Otherwise they should clearly be identified as salespeople.
Support for the fiduciary standard and elimination of the “suitability” standard should be part of the Democratic platform.