“Buyer Beware”

By Eric Burkholder

This a great blog post by Dan Wheeler.  Click Here.  A little background on Dan:  Dan is a CPA who has an extensive background in accounting and finance.  He recently retired from his spot at Dimensional Fund Advisors as director of Financial Advisor Services after 21 years.  He now is semi-retired and writing his own blog titled “Wheeler Writes.”

Prior to starting his career in the fee only advisor business he had a notable stint working for Merrill Lynch servicing retail clients.  It was this experience which ultimately led him to see the ethical failing of the commission based financial services industry and start out on his own as a fee based advisor.

He is currently writing a series of blog posts that speak to his time at Merrill Lynch.  I highly recommend everyone read his blog.  He discusses the same issues I often mention, but with the most important distinction of having actually lived it.  So I repost his short blog article and implore you to read it. (“Implore” was the fanciest sounding word I could think of to say “I really, really, really think you should read it.”)

Before reading it I want to highlight a few points that I think are especially relevant to you.

1)  This is not just Wall Street.  Most average investors think they are safe from these antics, but I promise you that all commission based financial services have the same things happening somewhere in their firm.  That includes your local advisor from Edward Jones, Salomon Smith Barney, UBS, or any other quasi-advisor/broker.

2)   Quote:

“But unlike other businesses, the Financial Services Industry works very hard to give the false impression that they are providing objective investment advice, not “selling” products.”

This cannot be emphasized enough.  There is nothing wrong with commission based sales.  The problem in the financial services industry is they work as hard as they can to appear as though they are providing a service, when ultimately they are providing a product.  This is deceitful and harmful to their customers.

3)  Quote:

“Being a CPA and having a conscious was both a blessing and a curse.  I was able to read and actually understand the Prospectus.  Very few in our office could and that was by design.  Of course, the investor was required to sign a statement saying they had read and understood the Prospectus basically signing away any future rights they may have should the investment not work out as projected.”

I have been harping on this for some time now.  After spending many hours poring through the prospectuses of some variable annuities I came to the conclusion there is no way the person selling this understands what they are selling.  Ignorance is not an excuse for advisors any more than for a Doctor who gives you the wrong medication because he did not understand how it worked.  These advisors either cannot understand these products or do not want to take the time to understand it.  If they did they would not sell them, but then they also would not get that 7% commission.  Additionally, I do know firsthand that the client is being pressured to sign these statements without truly being confident in what they are getting.

4)   And finally.  The most shocking thing is just what Dan states:  “My experiences are rather dated, and that is the point, nothing has changed!”  This was 30 years ago and nothing has changed!

Hopefully Dan’s experiences will help explain that these problems are not just issues fee only advisors create to serve their own self-interest.  These are real issues you will face not just problems on far off Wall Street.  In reality, advisors choose the fee only route because it is the right thing to do.  That is their bias.