6 ms·

Brokers Fight Rule to Favor Best Interests of Customers

104 points by gergles 12y ago

JumpCrisscross 12y ago
> The agency is trying to amend a 1975 rule, part of the Employee Retirement Income Security Act, known as Erisa, which outlines when investment advisers become fiduciaries — the eye-glazing legal term describing brokers who must put their customers’ interests first. “The real problem with revenue sharing is that it is an undisclosed, under-the-table payment from the broker to the adviser,” said Professor Bullard, though he noted that not all arrangements were conflict-ridden. The divergent standards between those - like me - who serve companies and sophisticated investors, and those who serve unsophisticated Main Street clients is startling. To me, it would be preposterous to not be fiduciarilly bound to a retained client. But apparently this is business-as-usual for retirement advisors. Similarly, I face liability if I do not disclose any related fees or payments to all parties following a transaction. But retail financial advisors see those agreements as trade secrets. There may be a good argument for obscuring this information from unsophisticated parties. I think the abundance of information available to be mis-interpreted by unsophisticated retail investors is part of the problem. But I haven't heard the brokers articulate it. As for fiduciary obligation, I cannot understand the present situation. But I also believe that banks should be partnerships, where at the end of the capital structure are the partners' personal assets. Perhaps I'm just old world.
- rayiner 12y ago
  It arises out of a major difference in culture. The difference between servicing a client and selling to an arms-length buyer. After all, what salesmen owe their customers a fiduciary duty?
- not_that_noob 12y ago
  The sad part is that much of the current business model in the retail financial 'services' industry is built on obscuring what is in the end customer's best interest. This is why Vanguard has so much money fleeing towards them. What gets me is how otherwise very intelligent and successful people (engineers, execs, doctors - you name it) get suckered into bad investments because of a slick person in a suit. I really hope they push this rule through - it's in the best interests of so many hard-working Americans. Who cares if a few sharks have to starve? Maybe they can go sell used cars.
  - JumpCrisscross 12y ago
    Maybe moving from a % of assets under management scheme is necessary. I would want an investment advisor to earn a fixed dollar amount per quarter, regardless of assets under management. A generous bonus would be given for a fraction of returns above a benchmark. A stiff penalty would be assessed for exceeding loss (e.g. you shouldn't lose more than 10% in any given year) or liquidity (e.g. you should be able to withdraw $50 000 with 2 weeks' notice without impairing your assets' values by more than 2%). Half of any commissions paid to third parties would be deducted from the advisor's fees. Any incentive payments offered by fund managers would be split, 50/50, between the advisor and the client (e.g. as fee waiver).
    - gress 12y ago
      Why would any advisor choose to work under such a scheme?
      - tormeh 12y ago
        Everyone, if it was enforced by law as the only available conditions.
        db48x 12y ago
        If it becomes unprofitable (or less profitable than the alternatives) they'll just get out of the business altogether. I dunno if that's a bad thing or not, but you can't say that everyone would go along with it, just everyone who was left.
      - JumpCrisscross 12y ago
        Because a good performer will make more with performance incentives than under a flat compensation model. That is why hedge funds are structured with performance bonuses - managers believe in themselves.
        gress 12y ago
- lkiv 12y ago
  > I face liability if I do not disclose any related fees or payments to all parties following a transaction. Mind elaborating on this? Why don't you need to disclose related fees and payments _before_ the transaction (so that other parties can enter any deal with knowledge of potential conflicts)?
shiven 12y ago
Link is NYT-walled on my iPhone. Could the mods replace it with a link to the full article please?
- jonknee 12y ago
  ... It's a NYT article, this is the full article link.
  - shiven 12y ago
    Ok, now it loads in full. Earlier I was getting the login/signup screen after pressing the "show full article" button on the iPhone. Thanks!
wehadfun 12y ago
They should at least have to disclose if they are getting a paid to recommend funds.
maxcan 12y ago
Unfortunately, there will always be people looking to take advantage of the foolish and unsophisticated. The only solution is on the demand side - reduce the number of foolish and unsophisticated buyers by teaching real financial literacy to the population. Of course no one wants to do this because the industry doesn't want to stop ripping people off and "progressives" and "liberals" don't want to admit that the "the high school science teacher who didn’t realize she had been sold a variable annuity" has agency and shouldn't have been buying a product that she didn't understand and which a quick google search should have quickly warned her about.
- gohrt 12y ago
  Why do we bother making {lying, stealing, killing} illegal, when we could just rely on people to have the agency to avoid getting hit? Because we live in a civilization.
  - harryh 12y ago
    Lying isn't illegal.
    - plink 12y ago
      Try that in court.
  - maxcan 12y ago
    Luckily for you, lying isn't illegal. A better example is this: Someone goes into a used car lot and explains to the dealer that they live in a cold climate with lots of snow, have three kids, and go camping a lot. They explain that they need a car with lots of cargo room, is reliable, cheap to maintain, and which is good in icy conditions. The dealer proceeds to talk the buyer into buying a 20 year old porsche 911. It doesn't satisfy any of the stated needs and costs the buyer money that they didn't need to spend. The dealer's actions were clearly unethical. But, should they be illegal? Thats a very complex question and not one that can be answered by "MOAR REGULATION!" demands.
critium 12y ago
Thats why we created the service that highlights these broker abuses that we did. But what we found was, people actually dont __WANT__ to care. Which is really really sad.
- critium 12y ago
  P.S. These guys are really really good. And they are your friends, your neighbors. They will invite you to golf tournaments, help you talk to the local private school director (who is also their client) and then they're ingratiated. If you're not anglo and male, they'll bring an attractive assistant along that looks like from your home country and speaks your language. Its actually in their playbook (yes a real playbook). I found out somebody talked by parents into a variable rate annuity. The worst of the worst. Guess who it was? My cousin.
  - saryant 12y ago
    I got hit with this by a college roommate who joined Primerica. I didn't know anything about investing during college so I let him open a Roth IRA for me and put in $100/month from my part-time job. I fell for everything from him and his boss. Looking back, I definitely feel like a moron. The fund he had me in was terrible. An expense ratio of something like 1.5%, a maxed-out 12b1 fee and a front-load sales charge of 5.25%. At least it wasn't an annuity. Once I graduated and got my first full-time job, I started reading over the 401k material and doing my own research which lead me to the Boglehead's site. I slowly began the realize the fraud my friend had pulled over me. When I presented him with the evidence, he literally lied to my face. That or he had so completely swallowed Primerica's literature that he believed himself. He tried to tell me that their fund had outperformed the market (it had not) and had stayed stable through the 2008 crash (it had not, it lost far more than the market). He tried to convince me that the fees were actually quite low compared to the average (obviously not) and that Vanguard was in fact more expensive. I ordered him to transfer the entire account over to Vanguard and we haven't spoken since. (Another unspoken advantage of Vanguard or Schwab: if they do something I don't like, I can safely pull my business without risking a personal relationship)
slg 12y ago
Devil's advocate, why should the financial service industry be different than any other sales industry? Remember most financial service people are simply salespeople pushing a product. No one would bat an eye if a used car salesman put his own personal interest above the interest of his customer? Why should we then be outraged when someone sells you an annuity that isn't the ideal product for you? If it is my responsibility to educate myself enough that I don't spend an extra grand when the dealer recommends they undercoat my new car, why shouldn't I have to educate myself on why I shoudn't purchase an annuity in my new IRA?
- zdw 12y ago
  > why shouldn't I have to educate myself The problem with this argument is that it devolves into: 1. Requring that everyone knows everything about everything (total knowledge) 2. It being acceptable to take advantage of anyone who doesn't do #1 I see this argument as a trust issue. I'd prefer to live in a society free from kickbacks and money passed under the table, and arguing for it is the first step to even worse corruption. Personally, I'd love for it to be self regulating - for example, the "You break the candy bar in half, I get to pick which piece I get, and you get the other" model, where the best action for the breaker is to make a perfect 50/50 cut. I'd love for honesty to be the best policy for all involved parties.
- md224 12y ago
  > No one would bat an eye if a used car salesman put his own personal interest above the interest of his customer? That could be because they expect used car salesmen to behave unethically. In that case, their "not batting an eye" would indicate that they don't feel a responsibility to address this injustice, not that the act under consideration is perfectly just by their standards. > Why should we then be outraged when someone sells you an annuity that isn't the ideal product for you? Because it strikes us as violating our ethical principles. From my perspective, business should be about providing value for the customer. Taking advantage of people to get their money is terrible, and I would think less of anyone (car salesman or financial planner) who did so. A good salesman persuades customers to take action that is beneficial to both parties.
ipsin 12y ago
For anyone curious, the link to the proposed rule in the article is broken. http://webapps.dol.gov/FederalRegister/HtmlDisplay.aspx?DocId=24328&AgencyId=8&DocumentType=1 http://webapps.dol.gov/FederalRegister/HtmlDisplay.aspx?DocI... is the actual link. I believe that a rule change will save many small investors from being fleeced, but attempting to read this proposed change also made my brain hurt.
bickfordb 12y ago
Although potentially this might help people trapped in employer sponsored 401k plans, this seems too little too late? The trend appears to be for retail investors is to be invested in passive asset allocation mixes of ETFs which have no sales commissions.
shaneleonard121 12y ago
Here in the UK, they introduced rules last year to get rid of conflicts. No more kickbacks from the money managers to the advisors. Result, lots of the advisors have shut down, as that was their main income. Difficult to say, whether no advice is better than biased advise! My gut feeling is yes. Forces us to think for ourselves.

104 points by gergles 12y ago

> The agency is trying to amend a 1975 rule, part of the Employee Retirement Income Security Act, known as Erisa, which outlines when investment advisers become fiduciaries — the eye-glazing legal term describing brokers who must put their customers’ interests first. “The real problem with revenue sharing is that it is an undisclosed, under-the-table payment from the broker to the adviser,” said Professor Bullard, though he noted that not all arrangements were conflict-ridden. The divergent standards between those - like me - who serve companies and sophisticated investors, and those who serve unsophisticated Main Street clients is startling. To me, it would be preposterous to not be fiduciarilly bound to a retained client. But apparently this is business-as-usual for retirement advisors. Similarly, I face liability if I do not disclose any related fees or payments to all parties following a transaction. But retail financial advisors see those agreements as trade secrets. There may be a good argument for obscuring this information from unsophisticated parties. I think the abundance of information available to be mis-interpreted by unsophisticated retail investors is part of the problem. But I haven't heard the brokers articulate it. As for fiduciary obligation, I cannot understand the present situation. But I also believe that banks should be partnerships, where at the end of the capital structure are the partners' personal assets. Perhaps I'm just old world.

rayiner 12y ago
It arises out of a major difference in culture. The difference between servicing a client and selling to an arms-length buyer. After all, what salesmen owe their customers a fiduciary duty?
not_that_noob 12y ago
The sad part is that much of the current business model in the retail financial 'services' industry is built on obscuring what is in the end customer's best interest. This is why Vanguard has so much money fleeing towards them. What gets me is how otherwise very intelligent and successful people (engineers, execs, doctors - you name it) get suckered into bad investments because of a slick person in a suit. I really hope they push this rule through - it's in the best interests of so many hard-working Americans. Who cares if a few sharks have to starve? Maybe they can go sell used cars.
- JumpCrisscross 12y ago
  Maybe moving from a % of assets under management scheme is necessary. I would want an investment advisor to earn a fixed dollar amount per quarter, regardless of assets under management. A generous bonus would be given for a fraction of returns above a benchmark. A stiff penalty would be assessed for exceeding loss (e.g. you shouldn't lose more than 10% in any given year) or liquidity (e.g. you should be able to withdraw $50 000 with 2 weeks' notice without impairing your assets' values by more than 2%). Half of any commissions paid to third parties would be deducted from the advisor's fees. Any incentive payments offered by fund managers would be split, 50/50, between the advisor and the client (e.g. as fee waiver).
  - gress 12y ago
    Why would any advisor choose to work under such a scheme?
    - tormeh 12y ago
      Everyone, if it was enforced by law as the only available conditions.
      - db48x 12y ago
        If it becomes unprofitable (or less profitable than the alternatives) they'll just get out of the business altogether. I dunno if that's a bad thing or not, but you can't say that everyone would go along with it, just everyone who was left.
    - JumpCrisscross 12y ago
      Because a good performer will make more with performance incentives than under a flat compensation model. That is why hedge funds are structured with performance bonuses - managers believe in themselves.
      - gress 12y ago
lkiv 12y ago
> I face liability if I do not disclose any related fees or payments to all parties following a transaction. Mind elaborating on this? Why don't you need to disclose related fees and payments _before_ the transaction (so that other parties can enter any deal with knowledge of potential conflicts)?

shiven 12y ago

Link is NYT-walled on my iPhone. Could the mods replace it with a link to the full article please?

jonknee 12y ago
... It's a NYT article, this is the full article link.
- shiven 12y ago
  Ok, now it loads in full. Earlier I was getting the login/signup screen after pressing the "show full article" button on the iPhone. Thanks!

wehadfun 12y ago

They should at least have to disclose if they are getting a paid to recommend funds.

maxcan 12y ago

Unfortunately, there will always be people looking to take advantage of the foolish and unsophisticated. The only solution is on the demand side - reduce the number of foolish and unsophisticated buyers by teaching real financial literacy to the population. Of course no one wants to do this because the industry doesn't want to stop ripping people off and "progressives" and "liberals" don't want to admit that the "the high school science teacher who didn’t realize she had been sold a variable annuity" has agency and shouldn't have been buying a product that she didn't understand and which a quick google search should have quickly warned her about.

gohrt 12y ago
Why do we bother making {lying, stealing, killing} illegal, when we could just rely on people to have the agency to avoid getting hit? Because we live in a civilization.
- harryh 12y ago
  Lying isn't illegal.
  - plink 12y ago
    Try that in court.
- maxcan 12y ago
  Luckily for you, lying isn't illegal. A better example is this: Someone goes into a used car lot and explains to the dealer that they live in a cold climate with lots of snow, have three kids, and go camping a lot. They explain that they need a car with lots of cargo room, is reliable, cheap to maintain, and which is good in icy conditions. The dealer proceeds to talk the buyer into buying a 20 year old porsche 911. It doesn't satisfy any of the stated needs and costs the buyer money that they didn't need to spend. The dealer's actions were clearly unethical. But, should they be illegal? Thats a very complex question and not one that can be answered by "MOAR REGULATION!" demands.

critium 12y ago

Thats why we created the service that highlights these broker abuses that we did. But what we found was, people actually dont __WANT__ to care. Which is really really sad.

critium 12y ago
P.S. These guys are really really good. And they are your friends, your neighbors. They will invite you to golf tournaments, help you talk to the local private school director (who is also their client) and then they're ingratiated. If you're not anglo and male, they'll bring an attractive assistant along that looks like from your home country and speaks your language. Its actually in their playbook (yes a real playbook). I found out somebody talked by parents into a variable rate annuity. The worst of the worst. Guess who it was? My cousin.
- saryant 12y ago
  I got hit with this by a college roommate who joined Primerica. I didn't know anything about investing during college so I let him open a Roth IRA for me and put in $100/month from my part-time job. I fell for everything from him and his boss. Looking back, I definitely feel like a moron. The fund he had me in was terrible. An expense ratio of something like 1.5%, a maxed-out 12b1 fee and a front-load sales charge of 5.25%. At least it wasn't an annuity. Once I graduated and got my first full-time job, I started reading over the 401k material and doing my own research which lead me to the Boglehead's site. I slowly began the realize the fraud my friend had pulled over me. When I presented him with the evidence, he literally lied to my face. That or he had so completely swallowed Primerica's literature that he believed himself. He tried to tell me that their fund had outperformed the market (it had not) and had stayed stable through the 2008 crash (it had not, it lost far more than the market). He tried to convince me that the fees were actually quite low compared to the average (obviously not) and that Vanguard was in fact more expensive. I ordered him to transfer the entire account over to Vanguard and we haven't spoken since. (Another unspoken advantage of Vanguard or Schwab: if they do something I don't like, I can safely pull my business without risking a personal relationship)

slg 12y ago

Devil's advocate, why should the financial service industry be different than any other sales industry? Remember most financial service people are simply salespeople pushing a product. No one would bat an eye if a used car salesman put his own personal interest above the interest of his customer? Why should we then be outraged when someone sells you an annuity that isn't the ideal product for you? If it is my responsibility to educate myself enough that I don't spend an extra grand when the dealer recommends they undercoat my new car, why shouldn't I have to educate myself on why I shoudn't purchase an annuity in my new IRA?

zdw 12y ago
> why shouldn't I have to educate myself The problem with this argument is that it devolves into: 1. Requring that everyone knows everything about everything (total knowledge) 2. It being acceptable to take advantage of anyone who doesn't do #1 I see this argument as a trust issue. I'd prefer to live in a society free from kickbacks and money passed under the table, and arguing for it is the first step to even worse corruption. Personally, I'd love for it to be self regulating - for example, the "You break the candy bar in half, I get to pick which piece I get, and you get the other" model, where the best action for the breaker is to make a perfect 50/50 cut. I'd love for honesty to be the best policy for all involved parties.
md224 12y ago
> No one would bat an eye if a used car salesman put his own personal interest above the interest of his customer? That could be because they expect used car salesmen to behave unethically. In that case, their "not batting an eye" would indicate that they don't feel a responsibility to address this injustice, not that the act under consideration is perfectly just by their standards. > Why should we then be outraged when someone sells you an annuity that isn't the ideal product for you? Because it strikes us as violating our ethical principles. From my perspective, business should be about providing value for the customer. Taking advantage of people to get their money is terrible, and I would think less of anyone (car salesman or financial planner) who did so. A good salesman persuades customers to take action that is beneficial to both parties.

ipsin 12y ago

For anyone curious, the link to the proposed rule in the article is broken. http://webapps.dol.gov/FederalRegister/HtmlDisplay.aspx?DocId=24328&AgencyId=8&DocumentType=1 http://webapps.dol.gov/FederalRegister/HtmlDisplay.aspx?DocI... is the actual link. I believe that a rule change will save many small investors from being fleeced, but attempting to read this proposed change also made my brain hurt.

bickfordb 12y ago

Although potentially this might help people trapped in employer sponsored 401k plans, this seems too little too late? The trend appears to be for retail investors is to be invested in passive asset allocation mixes of ETFs which have no sales commissions.

shaneleonard121 12y ago

Here in the UK, they introduced rules last year to get rid of conflicts. No more kickbacks from the money managers to the advisors. Result, lots of the advisors have shut down, as that was their main income. Difficult to say, whether no advice is better than biased advise! My gut feeling is yes. Forces us to think for ourselves.