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.
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.
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Sep. 2, 2006 - I think you have a very informative blog... |
| Posted by T |
I just happened to run across your homeschool blog. I think the contents are unique and well presented. Perhaps my financial/investing blog may be of interest to you.
www.investingfromtheright@blogspot.com |
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Sep. 2, 2006 - Reply to T |
| Posted by stevebraun |
Thanks for your encouragement and support. I'm glad you enjoy my blog. I also checked out yours and think you're off to a good start. Keep up the good work!
I wanted to leave a comment on your Yield post but you've opted not to allow non-registered user comments. Too bad. I don't feel like registering on yet another system so I had to pass.
You should consider allowing anonymous comments. It will encourage diaglog. Blogspot allows non-registered users to leave links without registering. That's convenient. There's really not much to fear from opening it up. You can always change later if you don't like it.
Best Regards, Steve
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Dec. 7, 2006 - I disagree |
| Posted by Anonymous |
In the interest of disclosure, I am a financial advisor, although not with Ed Jones.
I think it's part of our Capitalist heritage to be able to, as a corporation, decide who and who not to deal with. If Ed Jones decides it wants to sell only a few fund family's funds, then I believe that is their right. Ultimately, it is the forces of our consumer driven markets which will force Ed Jones to offer more choice, i.e., more fund families, etf's, etc. Or not. Either way, I feel it's appropo that brokers are required by regulators to disclose that, hey, my company is paid by this mutual fund company to have the privelege to come to my office and tell me about the new products or changes at "American Funds," (seems that's all Ed Jones sells) and they're one of less than 10 fund families I can offer you, out of literally hundreds that I can't.
If it's put that way, the client should be able to make an informed investment decision, I believe. So yes, I think brokerages should be able to revenue share as long as disclosure is presented to the client, because our Capitalist economic system will take care of the rest. Fee-based and Fee-only advisors will want the best performance results for their clients, which will mean they will look for the best investment vehicles, regardless of whether a fund wholesaler had the Home Office go-ahead to call that advisor to try to arrange a meeting of the minds.
Just my 2 cents, thanks |
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Dec. 11, 2006 - Reply to "2 Cents" |
| Posted by stevebraun |
I agree that a company should have the right to do business with whomever the management decides. In this case, being selective about mutual fund companies to represent for whatever reasons.
It is disingenuous, however, for these same companies to hide behind the regulatory protection of the SEC, NASD, etc. under the guise of offering "disclosure" to potential clients. That is my issue with this arrangement.
From a practical perspective, there is no such thing as full disclosure. Legally yes, practically no.
There is no way on earth that more than a handful of consumers are going to read, much less understand, the legalese and jargon laden documents that are supposed to "help" them understand what they are doing. It's a stacked deck in favor of the companies.
All I'm saying is that we ought to end the charade. The rules for disclosure should be revised from corporate-friendly to consumer-friendly. By all means, let companies compete as they see fit, but let's make sure consumers can really understand the differences.
Thanks for your input!
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