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“Lipstick On This Pig”: Why The Broker System Is Broken

It was supposed to be so much different by now.

Check out this ad from Schwab where the head of a brokerage firm instructs his staff to “put some lipstick on this pig.”

This ad ran in 2002.

Ah, how times have changed, right? Wrong.

Years later, many brokerage firms are still pushing investments that are suitable for client portfolios but not necessarily in the client’s very best interests.

“But wait,” you say. “What about all the problems encountered by Wall Street brokerage firms during the 2008 financial crisis? What about Madoff? Wasn’t there supposed to be some new magical era of accountability going on?”

If there was, they certainly haven’t gotten there. Objectivity isn’t always the name of the game in brokerages.

Note that we said brokerages but not brokers. That’s for good reason.

See, years ago, we got to thinking about this issue and came to the realization: Generally speaking, it’s not the brokers who are at fault. Really. It’s the bad system they’re trapped in.

We know plenty of brokers who are perfectly nice people who we would love to play a round of golf or share a beer with. But I also firmly believe some of these very same brokers are feeling an unheard of amount of pressure to push investments that they know, deep in their heart of hearts, are not the very best ones for what their clients would like to achieve.

It’s a system that incentivizes selling financial products in the short-term, not providing the very best financial advice to help people achieve their dreams in the long-term.

You can be a good person caught in a bad system. That’s what we believe has happened to far too many brokers.

This is not to say that there aren’t some bad apples in the bunch. There’s a reason why those brokers get barred or suspended by Finra. In a paper published last year by three professors from Stanford, the University of Minnesota and the University of Chicago, nearly one in 10 advisers at the average financial firm were found to have a record of serious misconduct. Did they lose their jobs after that misconduct? No. Most of them either kept their jobs or got a job at another firm, where about 1/3 of them went on to be repeat offenders.

So what does this mean to you?

It means that a broken system focused on incentivizing a broker to sell this or that financial product could cost you. If you were sold a financial product that was merely suitable for your portfolio but not a financial product in your very best interests, might it cause you to delay your retirement by five precious years? What if it delayed your retirement by even one or two years?

• Do you know exactly how much the total cost of services from your broker adds up to?

• Have you ever asked your broker if they get special incentives or commissions on the sale of a certain financial product?

It has to get you thinking, right?

Well, in the continuation of this topic in our next article, we’ll give you more than food for thought. We’ll supply you with a number of solid questions that every broker should answer in order to get you the clarity you need. This “cheat sheet” will come in handy in your next conversation with them, for sure.

As you gather this information about your broker, make sure you gather some information about a fiduciary that doesn’t get paid on commission for the special sale of a financial product – ever. Like our team at Fiduciary Financial Partners. To arrange a no-hassle review of your statements to help you Confidently Embrace Your Financial Future, give us a call today at 630.780.1534.

Fiduciary Financial Partners, LLC is a Registered Investment Adviser. This blog is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Fiduciary Financial Partners, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Fiduciary Financial Partners, LLC unless a client service agreement is in place. 

 

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