Losing Their Edge

For years, business professionals at the many financial conferences that I went to prophesied the demise of the small independent financial advisor (like me- Yikes!). Merge, they said, or be forced out of business by the big giants like Merrill, and Morgan, etc. I defiantly turned the other cheek and kept my business small, successful, profitable, and what’s most important- I had time for a vacation. Not too many Merrill or AmEX people can say that.
After reading this, I finally feel vindicated. It’s not how big or small you are – it’s the content, stupid. High quality, high service, independent and ethically run firms will flourish in today’s environment. People now, in the face of Enron and World Com scandals, want someone that has few conflicts of interests and they are willing to write a check for that service instead of being sold a product for a commisssion.
Read it (wall st journal 042906) and understand the difference from a fee-only advisors who acts as a fidiciary and a stockbroker that sells a product. Don’t get me wrong, a lot of commission planners really are ethical and care about their clients, but it is hard for them to do their job when their boss is telling them to sell xyz today. You decide. Time for them to look at “right livelihood”.
Hey, did you notice how I still write like I am a practicing financial advisor? Hmmmm……talk about attachment!
Stockbrokers Loosen Up Their Ties
As Advisers Gain Ground,
Big Firms Change Strategies;
The ‘Suitability’ Standard
By JEFF D. OPDYKE and LINGLING WEI
April 29, 2006; Page B1
Wall Street’s giant brokerage firms — long the dominant force in the investing game — are starting to lose their edge.
Increasingly, individual investors are turning over their money to independent brokers and advisers amid worries that big firms don’t always have their best interests at heart. Over the past five years, independent advisers have nearly doubled their share of assets under management to 17%, according to discount brokerage firm Charles Schwab & Co.
Now Wall Street is fighting back. Some firms are making changes to minimize perceptions that their advice isn’t as trustworthy as some of their more independent rivals. Morgan Stanley, for example, recently started highlighting that clients can pay a fee to have an adviser build a financial plan — and then execute the plan at another brokerage firm. The goal is to ease concerns that the Morgan Stanley broker might encourage the purchase of some product that benefits the broker more than the investor.
Others have started granting their advisers greater leeway to recommend a broader range of products, including more options that aren’t part of the brokerage’s own investment tools.
And some are moving away from in-house investments entirely. Late last year, Citigroup Inc.’s Smith Barney sold its asset-management arm, which created its own in-house mutual funds, to, in part, eliminate the perception of self-interest when suggesting investments to clients.
Moves like these reflect a power shift under way as investors — wary of undisclosed conflicts of interest after various market-related scandals in recent years — insist that their financial professionals have no incentive to pitch particular products because of commissions or underlying fees.
For investors, the new options add complications to the process of picking the right person to help with high-stakes investing decisions.
Deciding whether to hire a full-service broker or an independent adviser — or someone in between — comes down to whether you want advice tied to an individual transaction or advice designed to map out your financial life, and whether you want that advice delivered by a brokerage firm or an independent shop. Each has its strengths and weaknesses.
Stockbrokers
First and foremost, brokers are salespeople. So, when acting in that role, their income depends on commissions from client trading. As such, a broker is best for investors who want someone to bounce specific stock and mutual-fund ideas off of or who want someone who will call with investment suggestions. With brokers, you usually have the choice of paying per transaction or paying an annual fee for all the services you use, as in a so-called wrap account.
You will pay for that hand-holding, though. Commissions can easily top $100, depending on the type and amount of stock you are buying and the size of your account, compared with the $5 to $20 you would pay at an online firm such as Scottrade Inc. or E*Trade Financial Corp. Some Wall Street firms require a $50,000 account to even get access to a broker; otherwise, you will be sent to a call center, where the level of individual attention is often greatly diminished.
Another important factor: Brokers aren’t “fiduciaries,” meaning they have no legal requirement to act in your best interest. Instead, they follow much looser “suitability” guidelines that, while backed by court decisions, aren’t legal obligations. If you want a fiduciary relationship, a traditional brokerage account isn’t for you. For investors who don’t feel they need a broker’s advice or helping hand making trades, discount and online firms are a better choice, since they also charge considerably lower commissions on trades.
Investors may increasingly come across independent brokers these days. They aren’t employees of a traditional Wall Street firm but instead act as independent contractors with firms such as Linsco/Private Ledger Corp., a major independent brokerage firm, or Raymond James Financial Inc. Ostensibly, independent brokers have fewer reasons to push one product over another, and they generally have a broader selection of investments to sell and no sales quotas for particular products (unlike some traditional Wall Street brokers).
All of that should mean the independent broker is conflict-free. Yet that isn’t necessarily true.
In December, for example, the National Association of Securities Dealers imposed a $2.4 million fine on Linsco/Private Ledger for inappropriately steering investors into costlier class-B-share and C-share mutual funds that generated higher commissions for the brokers. Bill Dwyer, Linsco’s managing director of national sales, says, “We addressed any concerns regulators had, paid all the fines and moved forward.”
Financial Advisers
There are essentially two types of advisers. Those who work independently, or outside of a brokerage firm, are known as registered investment advisers, or RIAs. Those inside a Wall Street firm are investment-adviser representatives, since the firm itself acts as an RIA, although they may have a different title. Both provide essentially the same service: big-picture financial planning and money management.
Advisers are the best choice for investors who want someone to help lasso their entire financial life — from investing, tax planning and charitable giving to family-business succession planning and more — and take responsibility for managing the investments. You will generally pay an annual fee of 1% to 2% of the assets under management.
RIAs typically charge a single fee for all the services they provide, which can be less expensive than paying for all the services and trading separately. By contrast, brokerage-firm advisers offer that arrangement as well but also allow clients to separate fee-based advice from transaction-based trade execution, if that better fits their needs.
Brokers are increasingly wading into financial-planning and advisory roles. Most no longer call themselves brokers but, instead, financial advisers or financial consultants. Indeed, “there is some good, meaningful planning going on inside” brokerage firms, says Dan Moisand, president of the Financial Planning Association, a trade group.
Yet the advice a broker can provide is limited because of Securities and Exchange Commission rules. Advice brokers offer in a brokerage account must be incidental to the job of trading securities for you. That means while brokers can talk about how a stock or mutual fund fits into your financial scheme, they can’t offer a comprehensive financial plan. (Brokers are permitted to provide a financial plan, so long as it is part of an advisory relationship.)
Financial Planners
Investors have still another option: If you are looking for someone to fashion a financial plan that you will execute yourself through a traditional or online brokerage firm, you don’t need an adviser or broker but, rather, a financial planner. Look for someone with these credentials, which indicate an adherence to certain ethical standards as well as a level of knowledge: certified financial planner (CFP), chartered financial consultant (ChFC) or a certified public accountant with a personal-finance-specialist designation (CPA with a PFS). Advisers often sport one or more of these credentials as well.
Planners can provide the same services as advisers. The only difference is that they generally leave the job of managing your money up to the client.
The cost of a financial plan is typically a one-time fee of a few thousand dollars, depending on the complexity of your needs. Local advisers and planners can be found through the Web sites of either the Financial Planning Association (fpanet.org1) or the National Association of Personal Financial Advisors (napfa.org2).