Today continues a series, to appear roughly once per month, on the main ways that the financial system rips off the average worker and investor. This is based upon my nearly decade-long tenure in the financial services industry.
Unscientific, But True
What follows is not scientific. I have no studies or polls to quantify my observations. I do have 8 years as an Internal Wholesaler and Manager of Internal Wholesaling in which I spoke to or listened to 25-30 advisors a day and engaged in detailed conversations about their practices and clients. So, while the following observations are not scientific, they are not arbitrary.
I would break advisors into what I call the 5-25-70 rule of thumb. 5% of advisors are good; 25% are vile and 70% are just plain ignorant.
It is necessary to digress a bit and discuss the distribution channels of this industry. There are three main channels of distribution. One is the Independent Planners channel. The other two are the Bank channel and the Wirehouse channel. The bank channel is comprised of advisors who work in and are directly employed by bank owned broker/dealers. The overriding concern of bank sales managers is branch revenue. They simply want commission revenue and are not particularly picky about how they get it. The clients in this channel are mainly smaller investors of modest means who are not very money savvy, so they are particularly vulnerable.
The Wirehouse channel is made up of what were once known as high-end stockbrokers. These are people directly employed by firms such as Merrill Lynch and Morgan Stanly as well as several regional firms. These advisors cater to higher net worth clients who have larger than average amounts to invest. This does not exempt them from ignorance nor avarice, it just means they are held in higher esteem by many (undeservedly, I might add).
The Independent Planner channel is the third main distribution channel in the industry. This channel is made up of mostly self-employed advisors who operate under a trade name i.e. Smith & Jones Financial Services, etc. Although they are still required to process all trades through a broker/dealer. There is a wide range of advisor types in this channel. Everyone from a single operator working from their dining room table to a multi-advisor firm with millions under management.
The Good
When I talk of the 5% who are good, I mean they really understand how the system works and are largely aware of how the system is stacked against the average client. I am not saying they would agree with all that I have written about how policy drives the fleecing of investors, but they do understand that many investments cost too much and are too complicated. These advisors do their level best to keep their clients invested in lower cost products that are relatively simple to understand. They are not interested in over trading or “churning” their clients’ money to generate extra commissions. Many of these advisors are managed money advisors but they charge reasonable fees and genuinely try to discover their clients’ goals and match up the investment plan with those goals. These are also advisors who are very resistant to the worst practices of wholesalers. They will not take gifts and avoid lunches and free rounds of golf and vendor sponsored client events. I am not saying that every one of the clients of these advisors gets a great deal (there is a limit to how well anyone can do in an inherently flawed system). I am saying that all things considered those clients get what is likely the best deal possible from an advisor.
The 5% tend to be clustered in the Independent Planner channel. This seems to be the case because these are typically self-employed advisors who can take a longer view of their business and are not under the pressure of hitting a monthly or quarterly sales goal. This is not to say they don’t want to earn good money, just that those so inclined to do business the right way have a greater opportunity to do so in this distribution channel.
The Bad
Ironically the 25% who are vile also tend to be found in the Independent Planner Channel. These are advisors who are simply commission whores. They are brazen in their contempt for clients and want nothing more than to make a buck at any cost. They are so brazen that they are dangerous for banks or wirehouses to employ because they pose a regulatory and compliance risk. True they must answer to broker/dealers and can face compliance restrictions that may get them kicked out of a broker/dealer. They will, however, inevitably find another broker/dealer. Soon enough the word gets out which broker/dealers are willing to take on these types of advisors and they tend to cluster together.
The 25% also includes a subset of advisors who are not actually licensed to sell securities. They possess just an insurance license and sell the vilest form of product in the business, Equity Indexed Annuities. These are complicated bait and switch products aimed at vulnerable senior citizens who are easy prey to this type of sale. These flimflam artists literally drive from trailer park to trailer park in the Sun Belt hoovering millions from unsuspecting seniors. I will not go into detail about these types of products since I thankfully did not wholesale them. A good overview can be found here.
The Ignorant
That leads us to the clear majority: 70% who are ignorant. Now by ignorant I don’t mean stupid, although there are plenty of those. These advisors truly do not know the nature of the financial eco-system they inhabit; how it was created and who it helps and harms. They are mostly well-intentioned salespeople who are simply trying to make a living. Many are convinced they are doing something good and noble. They get this idea from the schools they attended, and these ideas are reinforced by the drumbeat of the media. They have completely bought into the current system and with all sincerity go about their business in ignorant bliss. Suffice it to say it is best not to do business with advisors in this group.
By the end of this series you should have enough information to seek out those advisors and solutions that can mitigate much of this risk. For now, I would suggest keeping in mind the following mental schematic regarding the 3 main distribution channels as a rough guide for which advisors to seek out. There is the Wirehouse Channel: they are “Wall Street” (with all its attendant baggage). Then there is the Independent Channel: they are “Main Street” (except for insurance only representatives-stay away!). Then there is the Bank Channel: they are “Sesame Street” (don’t waste any of your time here). I will further elucidate the various types of advisors in a later installment, when I turn to actual stories from the sales floor.
Praise Be to God
