Aug. 8, 2005 - The Cost of Confusion

I could just hear your thoughts when you read Whose Interests? last week.

"Nice to know, Steve, but this is all theoretical.  In the real world this issue isn't a problem for people like me."

Not so fast there.  Let's recap.

In Whose Interests? I wrote about the difference between those who sell investments (brokers) and those who advise about investments (advisers).  I pointed out that there has been considerable confusion in the marketplace since many brokerage firms now give their brokers innocent titles like financial "adviser," "consultant," or "planner" while retaining their primary role as sales reps.

To eliminate this confusion, the Securities & Exchange Commission now requires brokers to disclose that:

"The broker-dealer's interests may not always be the same as the client's." 

That statement ought to send off alarms in your head when dealing with anyone providing "financial advice."  The reason is that you can't ever be sure that the "advice" is for your benefit or the benefit of the broker.  That's an important distinction when you're talking about your life's savings!

I also pointed out that there is nothing unethical or illegal about such activity.  A salesperson sells.  What else do you expect?  It also doesn't mean that brokers are dishonest.  All I'm pointing out is that the SEC believes the public needs to be aware of what their getting into before trusting someone's financial advice.

A look at the real world.

Here's a brief news story that represents just the tip of the iceberg.  It comes out of the state of New Hampshire and involves American Express Financial Advisors (AEFA).

Essentially, clients paid AEFA for a low cost "financial plan" thinking they would get customized, objective advice.  What they got was a "cookie cutter" sales tool to promote AEFA's proprietary mutual fund investments, even though much better investments were available.  Simply put, AEFA put its interests above those of its clients.

Who pays the price for this behavior?  Always the client.

It should not shock anyone that a company wants to sell its own products over those of its competitors.  That's okay when those products are the best in category, but that is rarely the case.  Instead, the unwary client pays a steep price:

• Bad advice.
• Bad investments.
• Tough luck.

That's what happens when there is confusion between those whose primary job is to sell investments and those whose primary job is to advise about investments.  The former have loyalties that may not be in your best interests while the latter have a fiduciary responsibility to serve your best interests.

The financial services industry is a minefield of conflicting interests that unwittingly trip up trusting clients every day.  Know what you're getting into and the potential risks.  Be an informed consumer of investment advice.

At least in the New Hampshire case, however, there is a measure of justice.  AEFA agreed to settle with state regulators for $7.4 million in fines and restitution.  Hmmm.  What about the other 49 states?

Nov. 15, 2006 - something we agree on !!