

Brokers Fight Rule to Favor Best Interests of Customers - gergles
https://www.nytimes.com/2014/06/13/your-money/rule-to-make-brokers-act-in-clients-interest-still-pending-after-4-years.html?_r=0

======
JumpCrisscross
> _The agency is trying to amend a 1975 rule, part of the Employee Retirement
> Income Security Act, known as Erisa, which outlines when investment advisers
> become fiduciaries — the eye-glazing legal term describing brokers who must
> put their customers’ interests first.

“The real problem with revenue sharing is that it is an undisclosed, under-
the-table payment from the broker to the adviser,” said Professor Bullard,
though he noted that not all arrangements were conflict-ridden._

The divergent standards between those - like me - who serve companies and
sophisticated investors, and those who serve unsophisticated Main Street
clients is startling. To me, it would be preposterous to _not_ be fiduciarilly
bound to a retained client. But apparently this is business-as-usual for
retirement advisors. Similarly, I face liability if I do not disclose any
related fees or payments to all parties following a transaction. But retail
financial advisors see those agreements as trade secrets.

There may be a good argument for obscuring this information from
unsophisticated parties. I think the abundance of information available to be
mis-interpreted by unsophisticated retail investors is part of the problem.
But I haven't heard the brokers articulate it.

As for fiduciary obligation, I cannot understand the present situation. But I
also believe that banks should be partnerships, where at the end of the
capital structure are the partners' personal assets. Perhaps I'm just old
world.

~~~
not_that_noob
The sad part is that much of the current business model in the retail
financial 'services' industry is built on obscuring what is in the end
customer's best interest. This is why Vanguard has so much money fleeing
towards them. What gets me is how otherwise very intelligent and successful
people (engineers, execs, doctors - you name it) get suckered into bad
investments because of a slick person in a suit.

I really hope they push this rule through - it's in the best interests of so
many hard-working Americans. Who cares if a few sharks have to starve? Maybe
they can go sell used cars.

~~~
JumpCrisscross
Maybe moving from a % of assets under management scheme is necessary.

I would want an investment advisor to earn a fixed dollar amount per quarter,
regardless of assets under management. A generous bonus would be given for a
fraction of returns above a benchmark. A stiff penalty would be assessed for
exceeding loss (e.g. you shouldn't lose more than 10% in any given year) or
liquidity (e.g. you should be able to withdraw $50 000 with 2 weeks' notice
without impairing your assets' values by more than 2%). Half of any
commissions paid to third parties would be deducted from the advisor's fees.
Any incentive payments offered by fund managers would be split, 50/50, between
the advisor and the client (e.g. as fee waiver).

~~~
gress
Why would any advisor choose to work under such a scheme?

~~~
JumpCrisscross
Because a good performer will make more with performance incentives than under
a flat compensation model. That is why hedge funds are structured with
performance bonuses - managers believe in themselves.

~~~
gress
But good performers today don't have a flat compensation model they have no
downside risk and merely need to increase their assets under management.

------
slg
Devil's advocate, why should the financial service industry be different than
any other sales industry? Remember most financial service people are simply
salespeople pushing a product.

No one would bat an eye if a used car salesman put his own personal interest
above the interest of his customer? Why should we then be outraged when
someone sells you an annuity that isn't the ideal product for you? If it is my
responsibility to educate myself enough that I don't spend an extra grand when
the dealer recommends they undercoat my new car, why shouldn't I have to
educate myself on why I shoudn't purchase an annuity in my new IRA?

~~~
md224
> No one would bat an eye if a used car salesman put his own personal interest
> above the interest of his customer?

That could be because they expect used car salesmen to behave unethically. In
that case, their "not batting an eye" would indicate that they don't feel a
responsibility to address this injustice, not that the act under consideration
is perfectly just by their standards.

> Why should we then be outraged when someone sells you an annuity that isn't
> the ideal product for you?

Because it strikes us as violating our ethical principles. From my
perspective, business should be about providing value for the customer. Taking
advantage of people to get their money is terrible, and I would think less of
anyone (car salesman or financial planner) who did so.

A good salesman persuades customers to take action that is beneficial to both
parties.

~~~
maxcan
> That could be because they expect used car salesmen to behave unethically.

Do you really expect bankers to act ethically?

------
wehadfun
They should at least have to disclose if they are getting a paid to recommend
funds.

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critium
Thats why we created the service that highlights these broker abuses that we
did. But what we found was, people actually dont __WANT__ to care. Which is
really really sad.

~~~
critium
P.S. These guys are really really good. And they are your friends, your
neighbors. They will invite you to golf tournaments, help you talk to the
local private school director (who is also their client) and then they're
ingratiated. If you're not anglo and male, they'll bring an attractive
assistant along that looks like from your home country and speaks your
language. Its actually in their playbook (yes a real playbook).

I found out somebody talked by parents into a variable rate annuity. The worst
of the worst. Guess who it was? My cousin.

~~~
saryant
I got hit with this by a college roommate who joined Primerica. I didn't know
anything about investing during college so I let him open a Roth IRA for me
and put in $100/month from my part-time job. I fell for everything from him
and his boss. Looking back, I definitely feel like a moron.

The fund he had me in was _terrible_. An expense ratio of something like 1.5%,
a maxed-out 12b1 fee and a front-load sales charge of 5.25%. At least it
wasn't an annuity.

Once I graduated and got my first full-time job, I started reading over the
401k material and doing my own research which lead me to the Boglehead's site.
I slowly began the realize the fraud my friend had pulled over me.

When I presented him with the evidence, he literally lied to my face. That or
he had so completely swallowed Primerica's literature that he believed
himself. He tried to tell me that their fund had outperformed the market (it
had not) and had stayed stable through the 2008 crash (it had not, it lost far
more than the market).

He tried to convince me that the fees were actually quite low compared to the
average (obviously not) and that Vanguard was in fact more expensive.

I ordered him to transfer the entire account over to Vanguard and we haven't
spoken since.

(Another unspoken advantage of Vanguard or Schwab: if they do something I
don't like, I can safely pull my business without risking a personal
relationship)

~~~
PhantomGremlin
Keep this in mind next time you interact with a salesman. It's a quip I found
on the Internet:

    
    
       All really good salesmen temporarily believe
       whatever bullshit they are selling at the time.
       It's kind of like method acting.

~~~
free2rhyme214
You have no idea how sales really works do you?

~~~
dang
This comment breaks the two most important rules of HN threads: to say
something of substance and to be personally civil.

A good version of this comment would teach us something about how sales really
works, while being polite.

------
ipsin
For anyone curious, the link to the proposed rule in the article is broken.

[http://webapps.dol.gov/FederalRegister/HtmlDisplay.aspx?DocI...](http://webapps.dol.gov/FederalRegister/HtmlDisplay.aspx?DocId=24328&AgencyId=8&DocumentType=1)

is the actual link. I believe that a rule change will save many small
investors from being fleeced, but attempting to read this proposed change also
made my brain hurt.

------
shaneleonard121
Here in the UK, they introduced rules last year to get rid of conflicts. No
more kickbacks from the money managers to the advisors.

Result, lots of the advisors have shut down, as that was their main income.

Difficult to say, whether no advice is better than biased advise! My gut
feeling is yes. Forces us to think for ourselves.

------
bickfordb
Although potentially this might help people trapped in employer sponsored 401k
plans, this seems too little too late? The trend appears to be for retail
investors is to be invested in passive asset allocation mixes of ETFs which
have no sales commissions.

------
shiven
Link is NYT-walled on my iPhone. Could the mods replace it with a link to the
full article please?

~~~
jonknee
... It's a NYT article, this is the full article link.

~~~
shiven
Ok, now it loads in full. Earlier I was getting the login/signup screen after
pressing the "show full article" button on the iPhone. Thanks!

------
maxcan
Unfortunately, there will always be people looking to take advantage of the
foolish and unsophisticated. The only solution is on the demand side - reduce
the number of foolish and unsophisticated buyers by teaching real financial
literacy to the population.

Of course no one wants to do this because the industry doesn't want to stop
ripping people off and "progressives" and "liberals" don't want to admit that
the "the high school science teacher who didn’t realize she had been sold a
variable annuity" has agency and shouldn't have been buying a product that she
didn't understand and which a quick google search should have quickly warned
her about.

~~~
gohrt
Why do we bother making {lying, stealing, killing} illegal, when we could just
rely on people to have the agency to avoid getting hit?

Because we live in a civilization.

~~~
maxcan
Luckily for you, lying isn't illegal.

A better example is this:

Someone goes into a used car lot and explains to the dealer that they live in
a cold climate with lots of snow, have three kids, and go camping a lot. They
explain that they need a car with lots of cargo room, is reliable, cheap to
maintain, and which is good in icy conditions.

The dealer proceeds to talk the buyer into buying a 20 year old porsche 911.
It doesn't satisfy any of the stated needs and costs the buyer money that they
didn't need to spend. The dealer's actions were clearly unethical. But, should
they be illegal? Thats a very complex question and not one that can be
answered by "MOAR REGULATION!" demands.

~~~
techsupporter
Awesome, and just as soon as a long-term financial instrument is as clear and
unambiguous as a 2014 4WD Subaru versus a 1994 Porsche 911 (at least the 993
series had air cooling, which should work well in a cold climate), I'll be
right alongside you.

~~~
maxcan
thats exactly my point. even the most baroque, complex financial instruments
are arguably simpler than the mechanics of even a basic internal combustion
engine. but, due to cultural issues people are far more educated about the
mechanics of an automobile than they are about financial products.

~~~
walshemj
Ok so with profits funds is as simple as a basic two stroke IC engine with 3
moving parts not sure I buy your line

