Here is Part II of the Market Watch.com article we excerpted on Friday: Again excerpt with my highlights.
6. “We get paid by mutual-fund companies…”
Investors aren’t the only ones who pay fees to their financial advisers. Mutual-fund companies whose funds advisers recommend do too. Wall Street calls these financial relationships “revenue sharing.” While perfectly legal, critics have long likened the payments to kickbacks...
Financial advisers don’t dispute that it’s a conflict of interest; disclosures often label it as such. Some pros argue, however, that since the vast majority of big mutual-fund companies make revenue-sharing payments, they don’t necessarily give brokers an incentive to pick one fund over another. What’s more, while many independent financial advisers don’t accept revenue-sharing arrangements, those professionals may charge higher upfront fees to make up for the lost revenue, according to Terry Headley, a former president of the National Association of Insurance and Financial Advisors.
Just how much money is at stake? Typically, firms don’t disclose precisely how much revenue they get from revenue sharing — for competitive reasons, they say. But Edward Jones, a St. Louis-based brokerage, is an exception. It is required to publish figures, as a result of a 2004 regulatory settlement over its disclosure practices with the SEC, New York Stock Exchange and National Association of Securities Dealers. According the company’s website, Edward Jones received $164 million in revenue-sharing payments from investment and insurance companies in 2012, amounting to about 30% of its $555 million profit. Edward Jones declined to comment.
7. “…And the loan departments of banks.”
Mutual-fund firms aren’t the only ones that dangle incentives to financial advisers in exchange for access to clients. Increasingly, Wall Street’s biggest banks have been encouraging financial advisers to help peddle banking products like mortgages, checking accounts and credit cards. Banks say the strategy, known as cross-selling, isn’t just about boosting their bottom lines. It is also a convenience for investors and allows advisers to focus on meeting the client’s broader financial-planning goals. “It is something our clients have told us they want,” says a Wells Fargo Advisors spokeswoman.
Not everyone is impressed, however. Critics point out that the sales incentives that these firms have added to advisers’ pay packages could create a conflict of interest, especially since they only apply to in-house products. In addition, regular investor protections such as the fiduciary standard, which are designed to cover securities, rather than banking products like loans, don’t necessarily apply. “The real question is, Are you getting the best deal?” says Barbara Roper, director of investor protection for the Consumer Federation of America. “The convenience of getting everything in one place comes with a price.”
8. “You read our disclosures, right?”
While most financial advisers face conflicts of interest of one kind or another, informing investors up front about them is supposed to make it OK in the eyes of law, according to experts like securities lawyer Philip A. Feigin. Does disclosure really work? “It is a Norman Rockwell view of what people really do,” he says.
In fact, the “important information” that you should “carefully” before opening a Merrill Lynch Personal Advisor account runs to 52 single-spaced pages. A similar version from Wells Fargo Advisors is 27 pages. In general, compliance experts say, big brokerage firms have the lengthiest disclosures because their size and multiple business lines mean they have both the broadest range of offerings for investors and the most potential conflicts of interest. ......
Many advisers are upfront in detailing for clients precisely how they get paid. .....And many investors don’t know enough about the industry to start asking the right questions. That is where disclosures ought to come in, according to consumer advocates and many industry insiders.
Ultimately, these documents do include a lot of valuable information, lawyers and other experts say. But it’s a mistake to assume potential conflicts like sales incentives and revenue sharing which regulators and consumer interest groups tend to focus on most will be emphasized or explained in detail, according to Louis Harvey, chief executive of Dalbar, a compliance consulting company. “The thing you care most about may be on page 7 in a little note,” he says.
9. “We put more initials after our names than crown princes do.”
Hoping to stand out before potential clients, many financial advisers can point to their impressively long list of credentials. The problem is, there are so many of these, even industry insiders joke that it’s difficult to tell them apart. .....
.....While some designations are designed to indicate expertise in niche areas like handling divorce or insurance, among the most commonly seen are the CFP, or certified financial planner (a credential for those that emphasize helping clients save and prepare for events like retirement) and CFA, or chartered financial analyst (for those that specialize in picking stocks and other investments). Both are widely respected, according to consumer advocates and industry insiders, for their in-depth training requirements. But consumers seeking the right advice have their work cut out for them. (For a comprehensive guide, see Alphabet Soup of Advice.)
Another problem with designation inflation is that easy-to-get credentials could be listed right alongside those that are tough to get, which could diminish the perceived value of the latter. Tom Robinson, managing director for education at the CFA Institute, a trade association for investment professionals, says students spend an average of about 300 hours studying for each of three exams needed to earn the group’s coveted designation. Only about one-fifth of those who start make it all the way through. But not every organization is as rigorous. For some credentials, “you can take a weekend course and get a designation,” he says.
10. “You want to sue us? That is so cute.”
Think your broker ripped you off? Investments are complex, and every year, thousands of Americans come to the conclusion that they’re being taken advantage of. But not everyone gets his or her day in court. Brokerage firms, like many other types of companies, typically require customers to agree to arbitration hearings.......
Finra, and the Securities Industry and Financial Markets Association (Sifma), a trade group that represents Wall Street firms, say the arbitration system is designed to save everyone time and money, and ultimately makes it easier for investors to pursue small claims. But industry experts have long raised questions about the process. “We have a lot of issues in terms of fairness and transparency,” says Heath Abshure, Arkansas Securities Commissioner and president of North American Securities Administrators Association, a group of state securities regulators. “It is the brokers watching the brokers.”
One big point of contention: Even so-called “public” arbitrators, included in panels to ensure nonindustry perspectives, often still have ties of one sort or another to Wall Street, such as experience as a securities lawyer. .......
......Since 2011, investors have been effectively able to demand hearing panels that exclude arbitrators with explicit industry ties. (Roughly half do so.) On a separate front, Finra has been trying to make it harder for those with marginal industry ties to qualify as public. “We’re constantly improving the forum,” says Linda Fienberg, Finra’s director of arbitration.
Link: Market Watch: 10 Things Advisers Won't Say
