The Wall Street system rewards bad behavior.
As you know, there are some advisors that are crooks, that prey on people to make their high commissions. Those are the advisors that I want to punch in the face! (not literally but you get my point). Thankfully, this does not apply to all advisors. Advisors are sold the crap they sell which makes it not completely the advisor’s fault for selling inappropriate products with big commissions. They are part victim and part responsible for a predatory Wall Street system.
The information is available and advisors must educate themselves and understand that most of the products they sell are not in their client’s best interest. They should be curious enough to question the need of all the disclosure documents that their client’s sign. Instead, it’s all too common that these advisors find themselves like a rat on a wheel.They have to continue to produce commissioned sales to pay their bills. The crazy thing is that the immediate gratification of commissions from selling annuities and other financial products, is very short-sighted, a poor long-term financial decision and a poor business model. Can you see the irony? They should know better as financial advisors!
When I have advised financial advisors compensated by commissions, my recommendation is to build long-term relationships with clients based on advice. They will be much happier and truly help their clients and society.
For a contrast, we are compensated only by fees paid by the client. Here are the five reason why we hate the Wall Street system and why we are Fee-Only advisors.
- The incentive Is All Wrong
The broker is compensated based on what a financial product pays for commission NOT what is in the best interest of the client. That is why Wall Street has fought so hard to avoid the requirement of a Fiduciary responsibility (act in client’s best interest). The financial industry should be able to police itself like CPAs, Lawyers and Physicians do, but it doesn’t. I am not an advocate of more legislation but in this case, it is needed.
Our clients are very intelligent, successful people and they are sold these Wall Street products before they meet us. I fear that many less educated, less financially savvy people have been sold far more.
- Not on the Same Team
With commissions, your advisor is incentivized to line his or hers and their Wall Street firm’s pockets, not enhance your financial health. Why do we allow this crap as a society? We don’t teach our youth about money in our schools (see our Financial Literacy Outreach) and then we allow a system where Wall Street can prey on them/us! We are failing on two fronts. Come-on we are better than this.
These financial products are not built to be in the consumer’s or client’s best interest. We are at a disadvantage as consumers. I often tell clients when buying insurance products that John Hancock doesn’t have a big tower in Boston because they can’t figure out when we are going to die! They have a team of actuaries and underwriters at their disposal to calculate that. No, most Wall Street products are built to fatten their pockets, not ours.
- No Transparency
I will use an annuity contract as an example, it goes far beyond annuities. Have you ever tried to read an annuity contract? I do this for a living. I am a CPA who has dealt with, deals with a lot of complexity and I can barely understand them. We trust our professionals and rely on that trust and they turn around and kick us in the ____ and sell us this junk. I cannot count how many of these crappy annuity contracts I have had to analyze for new clients that were sold a bill of goods. After I do my analysis I always call the provider to verify my findings. However, I can’t call and ask them generic questions on a type of contract, no, no, no they keep the secrets of their bait and switch contracts very close to the vest. I must call with the client, so they will speak with me. So much for transparency, only when they are forced, or have to. None of this is hyperbole, that is not my style. You could speak with many of our clients who have been on the phone with me and the annuity company to get straight answers on the so-called guarantees, etc.
- No Value
Where is the value in an overpriced product that is created that way to incentivize the broker to get paid to sell it? These products can be so expensive, most costing far more, sometimes double or more than the same product at Fidelity, Vanguard and other low cost providers. In the case of annuities some costing 2% – 3% per year if you add on the guarantees. The “guarantees,” ha, I laugh! You must follow the strict rules in the contract to get the guarantees, which lock you in for life! These products are like the old commercials for the Roach Motel; “Roaches check in, but they don’t check out!” (I can’t take credit for this line, I have seen this referenced in many anti-annuity articles online).
These products are so expensive they are like “death by a million cuts” according to an insurance specialist I work with, who won’t sell this garbage. What he meant was each year you pay so much of your earnings to fees that you eventually bleed-out from all the costs.
Why are these products so expensive? Think about it, there are a lot of hungry Wall Street mouths to feed, or hands in the till. The broker/“advisor” has to be paid, then there is the branch manager, the Wall Street Firm and all the minions including; all of those compliance people to avoid lawsuits (there are a lot), the wholesaler salesman that sell the brokers, cost of the junkets in tropical places for the top-producers, and on and on. Then there is the company who actually manages the investments. It is a very expensive proposition.
- No Relationship
Behind the scenes the Wall Street broker is lobbied to sell this product over that one, so they get, or their firm gets a bigger commission. It is lunacy that we allow this. I get it with used car sales, buyer beware. We all have our defenses up when buying a car as we try to protect ourselves from the sharks. A relationship with an advisor around our financial well-being and future is not, or should not be a one-time purchase buyer beware event. That is the way it is set up and we allow Wall Street to act like they are on our side. We need to change the rules because Wall Street will not play fair. We need to know that they are not on our side. That this is an adversarial relationship, buyer beware. It is absolutely criminal that we allow this bait and switch, “I am on your side but please sign all of these disclosures that state I can’t be held responsible once you understand what I sold you”, relationship to continue to happen.
I advocate for a Win-Win relationship as outlined in our 5 Reasons We Are Fee-Only advisors.
The good news is that the consumer gets it. Consumers are flocking to Fee-Only Fiduciary advisors. It will probably take a while, but Wall Street as we know it will be like dinosaurs, steam engines, or My Space (are they completely gone yet?) extinct, an artifact of the past. Let’s work together to make this happen!
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