Salient to Investors:
Megan McArdle writes:
The Department of Labor is reported to be moving toward making brokers et al “fiduciaries” to their clients, so they would have to offer advice in your best interest, and avoid conflicts of interest such as accepting fees to put you into low-return, high-fee investment vehicles. Fiduciaries must avoid conflicts, but brokers are only required only to disclose them.
Industry professionals warn that if given fiduciary status, much of their revenue will disappear, and if they are not allowed conflicts, like earning higher fees on some investments, they will no longer be able to afford to service small accounts:
John Taft at RBC Wealth Mgmt said a completely conflict-free relationship does not work in practice across most of the brokerage industry.
When your broker’s firm underwrites an IPO of stock, they earn far more by selling those shares to you than selling you something else. When your broker buys you a bond out of the firm’s inventory, rather than on the open market, they also tend to make more money.
Assistant Secretary of Labor Phyllis Borzi said the brokerage industry is effectively saying: ‘If you don’t allow us to continue to give conflicted advice, we won’t be able to give any’.
Fiduciary relationships are expensive, and changing the status of brokers will raise the direct cost of having a broker give you advice. However, brokers essentially are arguing that they cannot afford to give you honest advice and that their livelihood depends on being able to steer you into investment vehicles that pay them kickbacks. This is free advice you cannot afford.
Most people erroneously believe that they already have a fiduciary relationship with their brokers. They do not, by and large, understand how much of a brokerage firm’s income comes from steering them into the investment-of-the-month, which is why brokers find it relatively easy to do so.
Wall Street will fight the Labor Department hard on this issue, but in the long run, it will be better for them and their clients if they lose.
Read the full article at http://www.bloomberg.com/news/2013-08-13/you-can-t-afford-your-broker-at-any-price.html
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The heart of the matter: Fiduciaries should avoid conflicts, but brokers are generally required only to disclose them.
“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.
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.
“The [brokerage] industry is saying, in effect, ‘If you don’t allow us to continue to give conflicted advice, we won’t be able to give any,’ ” Assistant Secretary of Labor Phyllis Borzi, who oversees retirement benefits, told me. “But there are lots of people out there who are already acting as fiduciaries, and they’re not bankrupt. They’re making money.”