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When Your "Advisor" Isn't

In December 2010, I shared one of my favorite reads with you, “The Investment Answer,” co-authored by Dan Goldie and the late Gordon Murray. Diagnosed with terminal brain cancer, Murray chose to use his final days to craft this simple, but powerful book from his perspective as a “born again” investment banker who’d seen the light on investors’ best interests, and advisor relationships best suited to assist them.

There’s advice, and then there’s advice

Murray and Goldie described, among other things, the critical difference between a fee-only, investment advisor representative, versus the traditional, Wall Street “advisor.”

  • As a fee-only, Registered Investment Advisor firm, our constant and singular allegiance is to you as an investor client. In a fiduciary relationship with you and compensated only by transparent advisory fees you pay directly to us, we are legally obligated as well as strongly incentivized to serve your highest financial interests.
  • A commissioned brokerage firm’s primary interest is to execute your trades and/or sell you in-house products. This also is how they get paid: through commissions or other transaction-based arrangements that may or may not be visible to you. While brokers are happy to dispense “incidental” advice along the way, serving your highest financial interest is neither their legal obligation nor typically their strongest business incentive.

Fiduciary or incidental advice?

Therein lies the confusion. While you really should consider the value of the “advice” being dispensed according to whether it’s fiduciary or incidental, you and other investors are often left on your own to determine which relationship you’re in. It’s in the fine print, but often well-buried, if you don’t know to ask about it.

Any improvements?

Two-plus years have passed since The Investment Answer was published, along with a ton of unfolding news and increased financial industry scrutiny on the subject of fiduciary duty. But time has not healed this wound. Scanning current headlines, the murky relationships between brokers and investors stubbornly persist.

For example, in a recent InvestmentNews article reporting on changes to how Bank of America is planning to compensate its Merrill Lynch division brokers: “Bank of America, the second-biggest U.S. lender, proceeded with introducing the new awards for advisers who steer clients to use more of the bank’s products. … Bank of America advisers who increase the flow of funds by at least 10 percent are eligible for so-called strategic-growth awards starting next year.” (Source: “BofA’s Moynihan vetoed Thiel’s plan to cut broker page,” InvestmentNews, December 20, 2012.)

A bank or brokerage firm’s compensation formulas are complex, and not always subject to public scrutiny. The details of this particular illustration may well have changed again by the time you’re reading this. But the general theme remains clear. To me, there’s a night-and-day difference between steering clients – particularly in the direction of one’s own products – versus advising them, with no internal corporate “strategic-growth awards” standing in the way.

In 2013, let there be light … and increased fiduciary advice.

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