In a Fiduciary September webinar, Alan Moore (XYPN), me and Institute for the Fiduciary Standard founder/CEO Knut Rostad talked briefly about the competition between fiduciary advisors and what I consider to be the predatory mindset of the brokerage firms.
Moore is against negative marketing; that is, running down competitors in order to make yourself look better. He says that process never works, and I tend to agree that you probably shouldn’t put something on your website denigrating Merrill and its ilk.
But as we were talking, it occurred to me that there might be a great opportunity to put the brokerage industry in its place in competitive situations.
Meaning?
The big advantage of the brokerage firms is that they’re big, and have big brands, which means a broker in the office down the street can talk about the big firm and the big brand and gain credibility that way. And those big firms can buy advertising with their billions in revenues—another advantage over the smaller fiduciary competitors.
But size can be turned against them as well. As, for example, consider how all the firm’s regulatory events and adverse arbitration cases are aggregated in one place. The brokers say they’re part of the big brand, and the big brand has its aggregate regulatory history right there on BrokerCheck.
So if you’re in a competitive situation with the brokerage office down the street, you might turn their size advantage against them.
Imagine the following prospect conversation.
Prospect: I’m frankly still looking around a bit.
Advisor: Really? Who else are you talking to, if you don’t mind my asking?
Prospect: There’s an office down the street from here. Edward Jones, I think it is.
Advisor: Edward Jones… Yes, I know a little bit about them. And I do think it’s possible to have a good, productive relationship with a sales agent.
Prospect: Wait… What do you mean, sales agent?
Advisor: People who call themselves advisors or financial planners follow a variety of different business models. Some do what doctors and lawyers do; they charge directly for their advice and services and work for their clients. Others are paid to recommend certain products or investment platforms, and they work for the firm and the product companies. I think you know how salespeople are paid, don’t you?
Prospect: Yes, but I’m not sure…
Advisor: The brokerage firms like Edward Jones pay their agents to sell their investment platforms. But that doesn’t mean they’re a bad choice. There’s nothing illegal about it. It just means they get paid differently and have different loyalties.
In fact, if you want, we can do a little checking to see more about them.
Prospect: Like how?
Advisor: There’s something called BrokerCheck, which is run by the regulators. It lists any regulatory infractions that a firm might have committed, and any instances where a client sued them through arbitration and the company had to disgorge some of the money that it has improperly taken from the client.
They set it up as a way for people like you to check the character of a firm, how seriously do they take securities regulations and whether they normally operate within the law. It’s just a quick check to make sure everything is okay.
Prospect: How long does it take?
Advisor: I have it up on the screen now. Firm: Edward Jones. There they are.
Oh dear…
Prospect: Oh, dear—what?
Advisor: Very disturbing. I suppose this is why the regulators created BrokerCheck, so you could be warned about firms that can’t seem to play by the rules. You can see it right here. 78 different regulatory infractions, 2 civil cases where they were taken to court, and 150 cases where their customers sought redress through arbitration. Those are usually cases where the firm had to pay back clients for money that they shouldn’t have taken in the first place.
And… 289 pages listing out the various regulatory and client incidents. That seems like a lot.
Prospect: So that means I shouldn’t work with them?
Advisor: Oh, I didn’t say that. As I said, there are a lot of people who seem perfectly happy taking advice from a salesperson. It’s just that—
Prospect: What?
Advisor: If you do decide to work with that office, then you should probably keep a close eye on everything. You might want to learn about the SEC regulations, and how to diagnose the costs you’re actually paying, versus the fees that they say you’re paying.
Prospect: I’m not sure I follow you.
Advisor: Well, if you twist their arm a little bit, they’ll disclose the commissions—they call them fees, the company and the platform are paying them—that they’re paid for getting you to invest on their platform. But you might have to dig a bit to find out that the investment firms on the platform, where your money goes, are paying them extra fees. It might be hard to find out exactly what the platform itself is charging. But you strike me as pretty intelligent, so I’m guessing that you’ll be able to dig around and find that stuff out if you put a little work into it.
And to be fair, I think we should check out our firm’s profile on BrokerCheck, just so you’ll have a basis for comparison. I’m curious myself; I haven’t looked at our profile in some years now.
Prospect: Okay.
Advisor: Here it is. This is what I expected: we have our registrations in place, no regulatory events, no civil events, and we haven’t been taken to arbitration by any clients who are claiming they suffered bad or illegal advice. We’re pretty careful to avoid those sorts of things and do everything above-board and in favor of giving good advice and service to our clients.
That’s OUR culture, but as I said, not everybody believes in those old-fashioned things these days.
Of course, this is just a sample dialogue, and you might have detected that I was having a bit of fun with it. The point that I was trying to make in my conversation with Rostad and Moore is that it’s up to every fiduciary advisor to educate the public about conflicts wherever they can—and they certainly won’t get any help from the regulators or, alas, the financial press.
You’re not allowed to say you adhere to a fiduciary standard on your Reg BI disclosures, but you can do a bit of judo on the brokerage industry in what might appear on the surface to be supportive conversations.