WSJ’s Investigative Report On Discount Brokers

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On Jan 10, the Wall Street Journal’s Jason Zweig and Anne Tergesen made news in the advice industry. They reported on how the “big three” discount brokers use sales incentives to get their advisors to gather assets and push certain products.

This article is an investor alert. Never mind disclosures and labels. Caveat Emptor. Discount brokers are fiduciary-free zones. Investors must arm themselves with pointed questions. Investors must demand in writing that advisors meet “Best Practices for Financial Advisors.”

Zweig and Tergesen, from interviews with “dozens” of former employees of Fidelity, Schwab and TD Ameritrade, wrote, “Nearly all the former employees said compensation practices encouraged workers to sell products that were more lucrative both for the firm and the employee – and cost customers more.”

Examples included how Fidelity reps earn “more than twice as much” when a customer invests in a managed account or annuity as opposed to most mutual funds and ETFs.

According to Zweig and Tergesen, former employees of all three firms “pointed to managed accounts they were urged by supervisors to sell.” These accounts, which are often “combined with a financial plan and advice,” may cost customers from 0.2% to 1.7% of assets annually. This is compared to lower cost investments such as target-date funds at 0.5% or robo/advice services “for as little as 0.3%.”

One former Fidelity employee, Sean Gray, said, “There is no way I can be a true fiduciary” acting in a client’s best interests when paid more to sell some choices than others. (This) created a conflict of interest and made it impossible to act in a true fiduciary capacity.”

According to a Fidelity internal compensation plan reviewed by the WSJ, extra incentive compensation, or “achiever” bonuses, “could amount to as much as $92,400 a year, jumping by thousands when incentive pay hit thresholds.” Fidelity consultants were motivated to reach these thresholds, according to several former employees, and “often favored products that paid them more to get there faster.”

A Fidelity spokesperson said the firm would not tolerate such a practice and, “We pride ourselves on doing the right thing for clients all the time.”

The story reported that all three firms, “said their advisory businesses comply with federal rules by acting in clients’ best interests.” Lawyers unaffiliated with the firm confirmed the compensation practices “are permissible under the rules so long as the complexity of the products is taken into account, potential conflicts are disclosed and the firms pledge to put clients first.”

Read the full article here by Knut Rostad, Advisor Perspectives

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