Sunday Musings: Brokers vs. Registered Investment Advisors

Ulli Uncategorized Contact

The WSJ featured an article titled “Taking Control,” which gives some advice as to how investors can better protect themselves against schemes and scandals.

I just want to hone in on one part that deals with potential conflicts of interest:

Financial advisers essentially fall under one of two of regulatory structures, one often considered stricter than the other. Under current law, “brokers”—who often are called financial advisers or wealth managers—don’t consider themselves to be “fiduciaries,” who are required by federal law to act in the best interest of their client. Brokers can put the interest of a mutual-fund firm ahead of yours, although they are required under law to follow a “suitability” standard, meaning they can’t recommend a product that is inappropriate for an investor.

On the other hand, “registered investment advisers” have to follow a fiduciary standard.
…

A big difference among advisers is how they are paid, and some have financial incentives to recommend one strategy or product over another. There is nothing necessarily wrong with commission-paid advisers, and many investors may well prefer to work with such professionals if it means they don’t have to pay a sales load. Still, it is important to know if an adviser has a financial incentive to recommend what he or she is recommending.

[Emphasis added]

While earning a sales commission is an honorable way to make a living in many industries, it has been more of failure than a success when it comes to the investment arena. The history books are filled with stories about scrupulous brokers and brokerage houses that used the commission structure for their benefit and not the client’s.

In the financial service industry, abuse tends to be greatest when larges sales commissions are at stake and many victims are clueless as to either what they are buying or getting involved with.

I believe that RIAs (Registered Investment Advisors), who work on a fee only basis (assets under management), will offer you the best opportunity to receive an unbiased opinion since money does not change hands whether you follow the advice or not.

If you think I am biased, you are absolutely correct. I am a fee based RIA, and I have represented this opinion for over 20 years.

Contact Ulli

Comments 12

  1. Ulli: Is it a good idea to have some bond funds in the portfolio (say 40%)?
    If interest rates rise, will the prices of bond funds not fall?
    So, how do we decide what bond funds to hold? Or what pecentage should be allocated to bond funds?
    Thanks

  2. Ulli,

    Just exactly what is your fee percentage since you mentioned that you have one? Also lets say since Oct. 2000 until today's date what would you say is your average compounded annual growth over that period for your clients just a ball park est. of the average would be appreciated. The reason I ask is because you are always writing about how good you doing and some of us would like to see some facts. A simple rounded off average would suffice as I don't want to write and ask for details as I don't need details just a simple answer like how much has $10,000 gained since Oct. 2000 as an example.

    Thanks
    J.J.

  3. Hi Ulli,

    When you manage peoples money do they send you their money or just give you a limited power of attorney to make trades thru their own brokerage account? I wouldn't send my money to anyone except to a name brand brokerage or mutual fund company. Also what is your fee for say $50,000 or $100,000 or $500,000 etc. Do your results in your domestic plan exceed 12% compounded annual gains over the last 10-15 years? Most advisers and or letter writers boast about their gains, but you seem to keep yours secret so I really don't have a clue as to if you have good gains or not. I do like your charts though as they give me a clue as to the direction of the overall market to compare to my own charts that I have set up.

    Thanks

  4. Ulli,

    This is what I believe after listening to my neighbors and friends in a huge retirement community in Florida about their financial disaster as a result of the "Crash of 08". I believe these people's experiences haved backed up my previous observation that many of the money mangers types etc. that were mentioned in today's blog are just "Money MANGLERS" more that anything else based on what they let their clients accounts decline in value to.

  5. I think the hedgies got it best. If they dont make a profit for their client, then they dont get paid either. Their take of 20% seems exorbent but if you are making a bundle for the client who cares right!!!

  8. There is a story I heard about someone looking at a boat dock near Wall Street.
    He asked who owned all those Yachts.
    He was told that they all belonged to the brokers.
    He then asked, "Where are all the customers' yachts?"

  9. Ulli,

    I think I remember you saying or writing or someone mentioned you in an article once that you averaged about 9.5% compounded annual growth rate, is that about right? That will at least beat any bank CDs or T-Bills/Bonds. I realize your program is a very conservative program and that is a good thing and probably explains the lower returns than one might expect by more aggressive advisers and or money managers.

    Thanks for all your work especially your free weekly letter as I have learned a lot from it and your blog although I believe there is a lot of bull **** on the blog written some of the people. Thanks again.

  12. I was one of those who got involved with a financial advisor of the ilk mentioned here. They cold called saying "Didn't you ask for a financial advisor?" I had just lost my husband (no, I had not asked for an advisor) and I imagine they got my name off some obit somewhere. Long story short, they put me in some one or two star lousy underperforming funds, charged me for the front load and when I saw their fee I freaked. I freaked worse when I educated myself and saw the fund ratings and performance.
    Needless to say I sold those later after some investigation. I signed on to the class action lawsuit against the company but only got $50 out of it. Maybe you can guess the name of the company?
    Then I found Ulli's blog here…thank god.

    Chris

Leave a Reply