Advisor or Salesman?

for sale broker by NeubieRecently I came across an article in the New York Times blogs section by Andrew Ross Sorkin that once again underscores the scary situation that many consumers of financial services face.  As I have mentioned here on several occasions, it’s important to know the source of any “advice” you might receive. This particular article includes comments from former brokers who have either retired or switched over to independent financial advisory firms.  One comment in particular gave me the shudders:
The difficulty I had in the brokerage industry is that you don’t get paid for the delivery of financial advice absent the sale of a financial product.  That is not to say the advice I rendered was not of professional quality, but in the end, I always had the sales pitch in the back of my mind.
This is not to construe that brokers cannot provide good advice – but rather, that even the brokers admit that the compensation system to which they adhere causes a bias that can be counter to the best interest of the client, the consumer of financial services. In addition to the explicit issue of compensation systems, since the broker/salesman is not required to act as a fiduciary, certain under-the-table compensation systems can be in place with “preferred” mutual fund choices which offer revenue sharing with the brokerage above and beyond commissions.  Disclosure of such arrangements is brand-new, only within the last year or so, and have come about in response to class action lawsuits against the likes of Edward Jones and Morgan Stanley Smith Barney. At one stage it looked hopeful that upcoming legislation might have an impact on this situation – the first version of Senator Dodd’s financial overhaul bill required fiduciary duty by all brokers and advisors – but this bill has been scrapped and who knows what (or when) will be the final outcome.  Stay tuned…
Photo by Neubie
IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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