How Investors Can Avoid the Toxicity of Wall Street

Last week’s op-ed piece by Greg Smith regarding his former employer, Goldman Sachs, was another example of a large financial services company being incentivized to make as much profit as possible at the expense of the client.

But I think that, perhaps, the key reason is that most investors fail to understand the inherent conflict of interest when using a Broker-Dealer (B-D) like Goldman, Merrill Lynch, Edward Jones or Smith Barney.

Much has been written about the higher level of legal protection that comes from the fiduciary standard when using the investment services of a Registered Investment Advisor (RIA), who operate as a “fee only advisor.”

This Forbes blog, “The Fee-Only Planner,” frequently posts  about the benefits of this fiduciary approach. It is unfortunate that those shocked by the Times article had not been reading the Forbes.com column.

An RIA is legally required to always act in the best interests of the client. A Broker-Dealer representative is not. B-D sales people are held to a lower “suitability standard” and are contractually required do only what is in the best interest of their employer.

A primary reason for the failure of the public to recognize the inherent difference between the RIA and the B-D representative is likely due to the Broker-Dealers’ use of titles for their sales people.

A Broker-Dealer rep is merely a sales rep, not an adviser. The B-D rep does not get paid to give advice and is not licensed to provide advice so they really cannot be called an “adviser.” The B-D reps get paid a commission when they sell a particular financial services product, the same way as, say, a car or insurance salesperson.

It is clear that when Broker-Dealers refer to their salespeople as “financial advisers” or “vice president,” the intent is to mislead the public as to their true purpose. The public would be less confused if the B-D rep’s title included the key word “sales;” call a B-D rep a “Financial Services Sales Representative” or “Branch Office Head of Sales” or “Assistant to the Chief Salesman,” and there would be much less confusion for the public.

But of course, confusion is what they are relying on. When salespeople are referred to as “advisers” or as official-sounding “Vice President” of this, that or the other thing, then the public is led into thinking they are being told or sold what is best for them. In fact, in the majority of cases involved in a commission-driven transaction, the client comes out on the short end of the “conflict of interest” stick.

In the case of Goldman Sachs, there are reportedly 33,000 employees, of which 12,000 of those are Vice Presidents. That would presume that there is 1 Vice President to manage every 2 other employees. Really? I suppose that some of them could be the actual, managerial type of Vice Presidents (though they probably call them something else). But I suspect that the vast majority of them are not. And the real reason for so many is because Goldman’s intent is to confuse the clients as to the real purpose of those Vice Presidents in generating income on behalf of Goldman’s bottom line. This scenario would seem to fit into the “toxic environment” mentioned in Smith’s Times piece.

The public is further confused when large Broker-Dealer affiliated companies are also registered as RIA’s and their B-D reps are registered both ways. With this dual registration, how would a client know if the representative was wearing the RIA hat and giving advice in the client’s best interest, or the B-D hat and selling a product for the company’s bottom line? The simple answer is that they cannot.

So, what can a smart consumer do to get real advice when it comes to investments, instead of being on the receiving end of a sales pitch? Here are some guidelines.

  1. Ask your advisor (or potential advisor) if they are a Registered Investment Advisor, or a representative of an RIA.
  2. Ask to see their Office Brochure or ADV form. This will outline their business methodologies and reveal any past regulatory problems. (Goldman Sachs has had many.)
  3. Ask if the individual is a representative of a Broker-Dealer. If so, know that they receive commissions, rebates, and/or kickbacks when they sell a product to you. To remove any uncertainty, it is best that you not use this person and subject yourself to this conflict of interest environment.
  4. Ask if the individual is dually registered as an RIA and a representative of the Broker-Dealer. If the answer is yes, you are unfortunately placed in the difficult position of never truly knowing which set of “legal standards” you are protected by, i.e., the “suitability standard” of a Broker-Dealer or the fiduciary standard of an RIA.
  5. Ask what professional designations they are qualified to use. CFP® and CFA® have some of the highest standards and ethics.
  6. Ask about affiliations. National Association of Personal Financial Advisors (NAPFA) and Garrett Planning Network are the two premier associations of fee-only advisors. (NAPFA sponsors this column, along with Forbes.com)

For the many readers of the Forbes.com “The Fee-Only Planner,” the article by Greg Smith was probably shocking, but not surprisingly so since these readers are well aware of the benefits of using an investment advisor who only operates as a fiduciary and who is legally required to do what is in the client’s best interest. It is truly unfortunate that so many investors learn about the conflict of interest when sales are involved, the hard way.

About the author

Michael Chamberlain, CFP®

Hello. My name is Michael Chamberlain CFP®, the principal of Chamberlain Financial Planning and Wealth Management. Our firm is “fee-only” with offices in Sacramento, Campbell and Santa Cruz California. “Serving clients from the mountains to the sea.”

Our mission is to help clients realize their full potential today while planning for an abundant tomorrow through comprehensive financial planning and collaborative decision-making.

As an experienced investment and planning professional, I have had the privilege of being interviewed by and contributing to hundreds of articles in such publications as Money Magazine, Financial Planning Magazine, ABC.com, Forbes.com, Nerdwallet, NASDAQ.com, Yahoo Finance and more.

I hope that you spend some time at the FiGuide site and learn more about the financial matters important to you. To learn more about our firm, visit our website www.chamberlainfp.com or give us a call at 800-347-1340.

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