Oct. 31, 2006 - A Step in the Right Direction

I've written before about how the financial services industry makes things very difficult for the average consumer to find and work with an adviser who places the client's interests over his own.

Part of the problem is with the regulatory environment that allows bad practices and part of the problem is with financial services firms taking advantage of the regulations to put their interests ahead of their clients.

One of the ways this charade is maintained is through the ubiquitous "disclosure" documents clients receive when signing up to turn their hard-earned money over to a financial services firm.  These documents are notoriously long, full of legal mumbo-jumbo, and designed to please regulators and avoid litigation rather than inform clients.

Some of that is about to change.

Today's Wall Street Journal ($ subscription only) reports that many of the big brokerage firms are taking steps to make their disclosure documents smaller and easier to read.  The hope is that clients will actually read the documents and understand what they're reading.

Gee, what a novel idea!

This is great news for the investing public.  My hat is off to those firms mentioned in the article who are taking these steps -- Morgan Stanley, Bank of America, Wachovia Securities, and Smith Barney.  Hopefully others will follow suit.

The bad news is that potential clients are still going to have to wade through a lot of legalese just to learn that, in fact, their financial adviser is NOT obligated to act in their best interests.  That hasn't changed.

For example, the article notes that Morgan Stanley is going from 14 documents totalling 136 pages down to a single document with 48 pages.  That's a huge improvement but I have to wonder just how many people are really going to read through a small book just to open an account with a financial adviser.  Not many.

Think about it.

How many of you read completely through those software license agreements that pop up on your computer screen?  I'll bet 99% of us just click "I Accept" and go on with life, never fully understanding or caring what we just agreed to.  In my experience, that's how most folks approach financial service firms' disclosure documents.  

It's one thing to accept blindly the terms which affect only your computer and quite another thing to do the same with your life savings.

My opinion is that all of this is unnecessary.  The only reason the industry has these goofy regulations and convoluted disclosure documents is because there are businesses which want to make as much money as possible off of their trusting clients.  They put their interests ahead of their clients because there is big money to be made by doing so.  The regulatory environment empowers companies to make that money just as long as they "disclose" that fact to their clients.

Your best defense is to read the disclosure documents, review in detail all contracts or other paperwork you must sign, and pay attention to what you're getting into.

It's your money.  You have the power.

Sep. 1, 2006 - Regulatory Hell

Reuters News Service reports that brokerage firm Edward Jones has settled nine class action lawsuits -- totaling a whopping $127.5 million -- for having failed to tell investors about its revenue sharing arrangements with mutual fund companies.  This comes on top of Jones having already paid $75 million in fines to regulators a few years ago.

Revenue sharing, you may recall, is an arrangement where a brokerage firm is paid by a mutual fund company to promote its mutual funds.  I most recently wrote about this practice using the analogy of rampant bribery in Nigerian soccer because that's exactly what it is -- bribery, kickbacks -- whatever you want to call it.

Jones is not alone in demanding and accepting revenue sharing fees.  Nearly the entire brokerage industry is feeding at this trough.  The practice will go on and on because there's big money involved. 

As much as I detest the brokerage firms for this practice, the real bad guys are the ones who let it happen -- the regulators.  Yes, that's right, the very goverment agencies (SEC) and industry watchdogs (NASD) charged with protecting the public allow this to happen.  To quote Reuters:

"It is not illegal for a brokerage to accept money from mutual fund firms to push their offerings but regulators have been cracking down on firms that fail to tell their customers about it, arguing investors have a right to know if the advice they receive might be influenced by such deals." [emphasis added]

To put it another way...

Regulators believe that it is okay for brokerage firms to conspire with mutual fund companies against investors as long as they announce the conspiracy in advance -- usually through an obscure "disclosure" document.  Then it's okay to fleece their trusting clients.

Imagine if the whole world worked this way.

• Bank robbery would be allowed as long as the robber sent a letter to the bank in advance and the bank opened for business anyway.

• Embezzling from employers would be just fine as long as employees posted notices by the water cooler about their intentions.

• Purse-snatching on the street would be legal as long as the thief wore a t-shirt that said, "Warning: I may snatch your purse."

This is worse than the fox guarding the henhouse.  There simply isn't any guard or henhouse for protection.  It's open season on the public.

Sound crazy?  Welcome to regulatory hell in the financial services industry.

Aug. 30, 2006 - Hurricane Ameriprise

Forget about Hurricane Katrina.  Hurricane Ameriprise strikes again in Baton Rouge, LA!  This time it's in the form of David McFadden, a broker with Securities America which is a subsidiary of Ameriprise.

The bad news just does not end for Ameriprise.

As usual, Hurricane Ameriprise wrecked many client accounts but this time also suffered a $22 million aribitration award for leaving McFadden "virtually unsupervised" according to the NASD.

Here's the damage report from McFadden's activities courtesy of yesterday's Wall Street Journal (subscription only):

• Lying to potential clients about his long-expired CPA credentials.
• Whittling Bradley Simon's $700,000 retirement account down to $267,000.
• Wiping out 73-year-old Pat Salatich's savings of $565,383 and leaving her with $73,000.
• Putting clients primarily in high fee variable annuities and "class b" shares of mutual funds.  (That's a shocker!)
• Attracting clients through "seminars" paid for by the firms whose products he sold.

With friends like McFadden, who needs enemies?!

All of this is brought to you by an industry that believes it can structure commissions and fees to reward brokers for screwing clients but fully expects them to defy natural human tendancies and take the high road.  This is as much a failing of the legal and regulatory environment as it is Ameriprise.  The whole system needs to change.

Ironically, Ameriprise has been running ads touting what they call "The Dream Book" to help all of us plan for retirement.  Maybe Ameriprise should go back to the basics and get their own house in order first. 

They've already turned enough dreams into nightmares.

Dec. 14, 2005 - Common Nonsense

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.

Dec. 2, 2005 - Ameriprise in More Hot Water

I thought we were done with Ameriprise. Then I opened today's Wall Street Journal and learn they are once again paying big fines to the Securities & Exchange Commission (SEC) and the National Association of Securities Dealers (NASD) for more bad behavior -- to the tune of $57.3 million! Like I said yesterday, some companies are just magnets for bad news.

Here's the breakdown:

• $30.0 million for recommending "preferred" mutual funds to clients and not disclosing to those clients that Ameriprise had "revenue sharing" arrangements with the providers of those "preferred" mutual funds. In other words, Ameriprise was being paid by certain mutual fund companies to get on its "preferred" mutual fund listing. That's right, Ameriprise's clients' well-being was sold to the highest bidders.

• $12.3 million for also pushing the mutual funds of certain mutual fund companies who steered their stock trading through Ameriprise's brokerage unit. This is known as "directed brokerage" in industry parlance. Us regular folks know it as "you scratch my back and I'll scratch yours." Unfortunately, Ameriprise's clients were getting clawed rather than scratched. 

• $15.0 million in disgorgement and civil penalties related to the above actions.

There you have it -- $57.3 million down the tubes! So now Ameriprise has learned its lesson, right?

But here's the dirty little secret behind the headlines.

Of the two infractions noted above, the second one (directed brokerage) is against the rules. We shouldn't see this one repeated unless Ameriprise is just plain stupid (but nothing is beyond the realm of possibility when money is involved).

However, the first infraction (revenue sharing) is perfectly legal. Ameriprise only got into trouble for not telling clients in advance that the company had these arrangements with some mutual fund providers. In other words, it is perfectly fine for a financial advisory firm to put its interests (greed) above that of its clients as long as they make that fact known up front. Doesn't that sound like a deal?

This inconvenient fact, of course, is never openly discussed with your financial adviser (unless you bring it up). Instead, the warnings are tucked away in neat little "disclosure" pamphlets or contract fine print which no one bothers to read. (Just like no one reads software licensing agreements before clicking the "I agree" button.)

That's exactly how they want it to be.

What you want is to do business with an adviser that is bound by a fiduciary responsibility to act in your best interests at all times.

Dec. 1, 2005 - Ameriprise and Your Child's College Education

It's not that I have anything against Ameriprise per se, but they are back in the news just as they were when I last posted on this blog at the end of August (see Ameriprise: American Express Reprise). Some companies have a way of generating negative publicity about themselves and Ameriprise (formerly American Express Financial Advisors) happens to be such a company.

Recently, NASD fined Ameriprise $500,000 for failure to supervise properly the sale of college savings plans (known as "529 Plans"). In addition, they were ordered to pay an additional $750,000 in restitution to investors for lost tax breaks.

What was Ameriprise's sin?

To understand Ameriprise's errant ways, you need to know a few basics about 529 Plans.

529 Plans are offered by all 50 states (plus a host of educational institutions) to help families save for college education expenses. Money saved in a 529 Plan can be spent at almost any college -- public or private, in-state or out-of-state. Generally, money is put into these plans on an after-tax basis and is invested to grow. The earnings on these contributions are not taxed when the money is eventually withdrawn from the 529 Plan to pay for higher education expenses.  It's a pretty good savings tool.

It gets even better!

Some states go a step further and offer a tax incentive to their taxpayers by allowing them to deduct some amount of their contributions from their state income tax returns. For example, here in Michigan a married couple may deduct up to $10,000 in contributions from their Michigan income tax return, thus saving about $400 in state income taxes.

Back to Ameriprise.

It turns out that Ameriprise was aggressively selling only one state's 529 Plan -- the Wisconsin plan -- which just happend to be the only plan Ameriprise carried at the time. It didn't matter than many of Ameriprise's clients lived in other states which offered their residents tax incentives. No matter where anyone lived, all clients were advised to invest in the Wisconsin plan from May 2001 to October 2003.

Why did Ameriprise do this?

Follow the money -- that's the 529 Plan they got paid for selling! Based on the information I have, the commission for selling the Wisconsin plan was 5.75% at that time. If Ameriprise had recommended any other plans to their clients, then they would not have earned any commission.

This would have been okay if investors were getting a better deal by investing in the Wisconsin plan. I mean, if you're paying a commission it ought to be because you're receiving valuable advice that will make you more money in return. What else are you paying for? However, in February 2004, Morningstar released its first analysis of 529 Plans and ranked the Wisconsin plan near the bottom of the list.

That's adding insult to injury. So much for getting good advice in exchange for that handsome commission!

Thus, Ameriprise was recommending one of the worst state 529 Plans on the market even though many of their clients could have done better by investing in their own state's plan AND received a tax break for doing so. All because that's what made more money for Ameriprise and its representatives.

But, heh, whoever said Ameriprise is supposed to look out for your bottom line before theirs? The truth is they aren't obligated to. They look out for #1 -- themselves -- even if it means risking some fines from NASD.

Ignoring the issue of how your financial adviser gets paid is a huge mistake and it will cost you dearly.

Sep. 28, 2005 - Ameriprise: American Express Reprise

I've written a few posts about the difference between financial advisers who have a fiduciary responsibility to their clients and those who do not.  (See The Cost of Confusion and Whose Interests?)

The subject of The Cost of Confusion post, American Express Financial Advisors (AEFA), is about to be spun off from the American Express empire and reincarnated as Ameriprise Financial -- a stand-alone financial juggernaut with more than 2.5 million clients and $400 billion in assets under management.  You'll be hearing a lot about Ameriprise in the coming months with an onslaught of advertising as they seek to establish a new identity.

The underlying business, however, remains the same.

To recap, AEFA is the company that State of New Hampshire regulators found to be defrauding clients by providing its advisers with incentives to push in-house mutual funds, even when better performing alternatives were available. 

How did this happen?  The company offered clients a "financial plan" which basically amounted to a sales pitch for American Express financial products.  New Hampshire regulators referred to these financial plans as "cookie cutter."  To add insult to injury, clients actually paid for these financial plans believing they were getting objective advice from a trusted adviser. 

Here's the kicker.  AEFA's crime was not that it engaged in this behavior, but rather that the company didn't disclose these conflicts of interest to prospective clients in advance.

In other words, it's okay in the financial services industry for clients to be duped into less than desireable investments just as long as they are told about it in advance.  That's why companies put together nice little "disclosure" documents and brochures hoping that clients will not actually read all the fine print or ask meaningful questions.

Doesn't that make you feel all warm and fuzzy about seeking financial advice?

That is why fiduciary responsibility is so critical.  Advisers who sell investments or insurance products DO NOT have a fiduciary responsibility to act in your best interests.  Instead, they are free to act in THEIR best interests just as long as they tell you about it in advance.

So will things be any different with the new and improved Ameriprise?  In the words of their Chairman and CEO, James Cracchiolo, as reported in today's Wall Street Journal:

"By offering a combination of investment and insurance products, within the context of a comprehensive financial plan, we help our clients not only grow but protect their assets."

Sounds like the same old program to me.  The problem is you can't be sure whether he really means to "grow and protect" your assets or just Ameriprise's.  Buyer beware.