Financial advice no one can afford

As regulators slowly–excruciatingly slow thanks to the formidable lobby of the financial industry–clamp down on rampant conflicts in the financial advice sales business, bank/broker/dealer/fund cos are all threatening a similar refrain: “if you make us be transparent, honest, accountable fiduciaries who can no longer take unfair advantage of our clients, then we won’t be able to afford to stay in the advice business.”

Its a lie of course.  True, they won’t be able to sustain their multi-tentacled, top-heavy, bloated, overpaid, extractive business models, but one can have a rewarding and worthwhile business offering fiduciary advice and management services. You do have to let go of the sales side to do it though. And yes, you do have to earn less from each client relationship and work more exercising a higher duty of care.  You aren’t allowed to steal from your clients.  You can’t abuse their trust. You can’t rehyphothecate or otherwise expropriate and risk client assets behind their backs.  You can’t rob them through multiple fees, cross-selling and hidden commissions.  No you can’t– its true.  But then, we as a society– our families, municipalities, foundations, pensions and vital institutions–can’t go on affording that type of financial counseling either.

An article today articulates the issues well:

“Having a completely conflict-free relationship doesn’t work in practice across most of the brokerage industry,” says John Taft, head of RBC Wealth Management in the U.S., which manages $250 billion. [good of Mr. Taft to admit the truth about his conflicts]

For example, when your broker’s firm underwrites an initial public offering of stock, he and the firm earn far more by selling some of those shares to you than selling you something else. When your broker buys you a bond out of his firm’s inventory of your broker’s firm, rather than on the open market, the firm also tends to make more money.

Industry groups have argued that if brokers can’t have any conflicts, like earning higher fees on some investments than on others, then they no longer will be able to afford handling small accounts…”

Read the whole piece here:  You can’t afford your broker, at any price

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