Today's fee-based "fiduciary"
financial advisors are DUAL
REGISTERED to charge fees
and receive commissions from
the investments they recommend.
"While many investors think that their financial adviser already is required to act in their best interest - like their doctor or their lawyer - the law hasn’t always required it. Financial companies often pay advisers more to promote certain products rather than to recommend what is best for their customers. That incentive creates what is known as a conflict of interest. And conflicts of interests sometimes can cause advisers to give bad advice." US Dept. of Labor - 2017
See the full Notice at https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/fact-sheets
Commentary and Words of wisdom from our Founder: "Be skeptical"
After more than 30 years in this business, it still leaves me shaking my head in awe.
Today's "new and improved" fiduciary Rule, that requires Investment Advisors to act in your best interest, still allows them to charge a management fee, accept promotional incentives and receive sales commissions from the things you invest in.
And if that doesn't inspire skepticism, consider also the fact that obtaining an "Investment Advisor" license today only requires passing a 140 multiple-choice question test. No actual education or experience is required.
To avoid sounding like the complainer without a solution, let me point to several other countries that have solved this problem by simply restricting the use of the term "Financial Advisor"; if they are unqualified by education and experience or receive any sales-related compensation, they must call themselves something besides "Advisor" so the conflict of interest is clear and obvious to the consumer - not buried in the fine print.
Why don't we do that in our country? Because self-regulated Wall Street spends gazillions of dollars lobbying to prevent it. This isn't the first time (go ahead and Google "Merrill Lynch Rule") and it probably won't be the last.
FirsTrust was designed by financial industry veterans who asked;
"What would WE want if WE were the clients?"
1. "Would we pay a fee for financial advice from a commission-paid sales rep?" No. Even if he or she is a well-intended "fiduciary", we would want an actual expert who doesn't receive commissions to handle our finances with complete objectivity.
2. "Would limit our investment choices to one bank or brokerage platform?" No, we would want the freedom to shop and compare investments from anywhere and everywhere without being obligated to promote products that favor an institution's profit agenda.
3. "Would we be okay paying retail profit margins, sales expenses and multiple layers of management fees?" No. We'd want to eliminate unnecessary expenses.
I believe most professionals in this business are honest and ethical. But there are too many unaware rookies who are happily drinking the company Kool-Aid; or aware but hopelessly addicted to the fancy title, company logo and paycheck; or aware and trying to do the right thing for their clients regardless.
Cynical? Probably. Realistic? Definitely. And today, it's worse than ever before. Wall Street is one of the most horrendously conflicted places on Earth, and the companies that profit from it deploy insurmountable resources to intentionally cloud the facts.
Here's a quick, true story that may help explain:
It's 1980-something; I’m standing in a cruise ship Casino among a crowd of passengers who appear hypnotized by a large number-wheel, spinning on the Casino wall. The wheel contains the numbers 1 through 100, and the objective is to correctly pick which number would be at the top of the wheel once it stops. An attendant in a tuxedo spins the wheel - a few gamblers place their bets – but the majority of the crowd just stands there, gazing at the wheel, each holding a little yellow pencil and a white note card that says "Number Tracker" across the top in bright red letters.
Each time the wheel stops on a number, the spectators bow their heads and begin scribbling on their Number Tracker cards. My curiosity grows, and I finally have to ask why:
“Excuse me, Sir,” I said to one of the gamblers, “May I ask what everyone’s doing?” He reluctantly revealed his Number Tracker card and said, “We're tracking numbers."
As I studied his card, I saw that he had been marking an X across the numbers that had won in recent spins. “Number 34 just came up on the last spin," he said, "so I know that I should not bet on it right now.”
“Why not?” I asked.
The elderly man raised his eyebrows and glared at me over his reading glasses. “Odds are against it", he said. "How likely is it that 34 will come up again on the very next spin?”
I quickly answered, “One in a hundred”.
He looked to the ceiling and calmed himself with a deep breath. "Now look," he said, "since number 34 just won, the chances of it winning again anytime soon are pretty remote - so I crossed it off my card. Understand?"
"Actually," I replied, "every time the wheel spins, each number has a one-in-a-hundred chance of winning - it doesn't matter which number won last time."
The old man threw his hands in the air and sarcastically barked, “Oh, I see; you’ve got it all figured out, and the rest of us are just a bunch of dummies, huh?”
He returned to his task as I stood there with one of those "Are you serious?" looks on my face.
And then it suddenly occurred to me: Who gave all those elderly people the little yellow pencils and the "Number Tracker" cards?
That’s right - the casino did. They know that humans tend to validate risk through irrational behaviors, so the house promotes it. They capitalize on it. And they even distribute the tools for people to do it with.
Is this illegal? No. But that doesn't make it right!
The same shameless profiteering has become a cornerstone of the Wall Street culture, and the once respected brokerage firm has become a mere product distributor at the expense of well-intended advisors and innocent investors.
So even when it seems like everybody else is doing it too, be smarter. Even when your portfolio is going up and everything seems fine, read the fine print. Ask tough questions. And seek objective guidance from an independent expert with no dog in the fight.
Why am I still in this business if I so despise its traditional culture?
Because this is where we can make a BIG difference.
No - it's not okay to promote consumer confusion and then profit from their lack of understanding - and our firm won't let it happen to our clients.
I guarantee it.
Michael T. Koenig
FirsTrust founder & CEO