My recent posts about shenanigans in the financial services industry have focused on Ameriprise Financial. I have nothing against them, per se, it's just that they happen to be the current poster child for all that is wrong in the industry.
Looking back over the past few years you'll find just about all of Wall Street's "finest" taking the lead role in the Hall of Shame -- Morgan Stanley, UBS, Edward Jones, Smith Barney, Raymond James, etc. My point is that the conflicts of interest are an industry-wide problem, not just for one firm.
It's what I call "common nonsense."
Common because the problems are so prevalent; nonsense because that's what it is. But don't take my word for it. Consider what others have to say.
"While mutual-fund investors may not realize it, there are often behind-the-scenes financial arrangements that greatly influence which funds a broker recommends for purchase...One is money that fund companies pay brokerage houses for a place on a list of funds that a firm most commonly offers. The second is different financial incentives that an individual broker may receive for selling one fund product over another." Wall Street Journal, 8-8-2003
"Brokerage firms...almost always have business arrangements that can affect which funds end up on their recommended lists. These arrangements often involve mutual fund companies making payments to brokerage houses...These deals, known as 'revenue-sharing' agreements, are wide-spread and help fund companies induce brokers to market their brand of funds out of the thousands of investment options that are available to clients." Wall Street Journal, 10-23-2003
"It has long been considered legal for a brokerage firm to receive payments from fund companies -- as long as the arrangements are properly disclosed. For years, brokers and funds have taken the position that vague disclosures buried in fund prospectuses are sufficient." Wall Street Journal, 3-31-2004
"...brokers were awarded points toward trips to Caribbean and European resorts for selling customers mutual funds from firms that were secretly making cash payments to the brokerage house...Brokers could stay in five-star accommodations and were treated to fine dining, skiing and tours, federal regulators said." Wall Street Journal, 12-23-2004
"They are among 13 brokerages found to be demanding cash payments under the benign heading of 'revenue sharing,' also known as 'pay to play.' The Securities and Exchange Commission isn't angry that these practices exist -- only that brokerages aren't telling clients that they do...This is conflict of interest on a monumental scale." Kiplinger's Personal Finance, May 2005
Monumental indeed. Let's see. The mutual fund company makes its money, the brokerage firm makes its money, and the brokers make their money. Hmmm...who looks out for your interests? Certainly not these folks.
Do you really want to be doing business with someone who is not 100% on your team and 100% behind your financial success?
All of this common nonsense is perfectly legal, just as long as the brokerage firm tells you in advance that it may not always act in your best interests -- like this nifty statement taken from Ameriprise's "Client Bill of Rights" on their website:
"As our client, you have the following rights...To be apprised of significant conflicts of interest related to the financial relationship between you, Ameriprise Financial or your financial advisor."
That's a warning flag that you are about to enter into a bad relationship. Use your common sense. Don't fall for common nonsense.
| 