Stock broker conflict of interest
Conflicts of Interest in Your Portfolio? What is a conflict of interest? According to Merriam Webster, a conflict of interest is defined as: In my experience in business, those in the legal profession seem to have the best understanding and provide the most disclosure on conflicts of interest.
Also, the company in question would be extremely displeased that the lawyer they had hired in the past to represent them had now become an adversary on the other side of the table against them! How do conflicts of interest show up in the world of investments? You are a client because you are looking for advice. However, what you receive may be something very different. These firms are in the business of selling products and producing a profit.
These products can be in the form of traditional brokerage services or investment advisory services wrap accounts. Advice from their salespeople also called stockbrokers and financial advisors is typically considered incidental to the sale of products they are promoting or helping you buy.
In other words, broker dealer firms are there to facilitate a transaction on behalf of the customer, with the focus on the transaction and not the advice. While this may seem confusing, and it is, it gets even more confusing because many of the advisors at these firms are dual registered as both advisors and brokers. Additionally, they may also be insurance licensed. Thus, providing objective advice to clients is exceptionally difficult for the salespeople employed at these firms.
The reasons can be attributed to three main factors: In my opinion, while all three factors are bad, reason three has the most influence. Salespeople at big Wall Street firms are typically not fiduciaries. So long as the products chosen are suitable, the advisor has done his or her job. It matters not if the advisor shows and sells a client the most expensive, highest commissioned product as long as the product is suitable.
This type of sales culture produces obvious conflicts of interest. Is the advisor selling the client products laden with the biggest commissions so he or she can maximize his or her paycheck?
Testimony: Conflicts of Interest Faced by Brokerage Firms and Their Research Analysts (L. Unger)
Suppose that a woman named Sue recently sold her company and has decided to retire. To add insult to injury, in many cases, especially with annuities and investment bank products, the commissions are not transparent and difficult to gauge.
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This payment scheme should certainly cause you to think twice about where you get financial advice. Caution should be exercised with dual registrants, especially those who are also insurance licensed. Ask lots of questions. Be critical of anything with a huge prospectus — these investments generally enrich the stockbroker completely at your expense. There is a better way to receive investment advice — work with a fee-only advisor who is subject to the Investment Advisers Act of and operates as a fiduciary for clients.
A fiduciary has a legal duty to act in the best interest of the beneficiary client. The fiduciary duty is a much higher standard than that of a stockbroker Securities Act of , which only requires suitability be established before products are sold. A fee-only investment adviser can offer you transparent, easily understandable pricing that is not attached to product sales.
There is a great comfort that comes in knowing your advisor is putting your interests ahead of her interests and not merely selling you products for commission. About the author of this article. Braid, CFA is the founder of HighPass Asset Management — an independent, fee-only, registered investment advisory firm with a fiduciary duty to the clients it serves.
Braid has been passionate about managing client investment portfolios and providing customized financial planning advice since he started working in the investment industry 13 years ago.
Braid earned a BS in Finance from Robert Morris University, an MBA from Cleveland State University and he is also a CFA Charterholder. Braid is devoted to being an expert in the field of wealth management for high net worth individuals and families and for many years, has read one book per month on subject areas such as: Braid is not helping clients, he enjoys: Wednesday, 21 June Client Login Our Blog.
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