The last few years have seen some saddening trends in the financial services industry. I'm not talking about the market itself but about the companies that support many of the independent financial advisors with whom an investor would work. These companies, called Broker/Dealers (B/D), are how commissioned brokers are legally able to sell financial products and be compensated for them. So although you visit Broker Joe Smith and probably didn't choose him because of his B/D affiliation, it's an important part of the equation. All B/Ds are responsible for the actions of their member brokers, therefore they set restrictions on how the broker must act and what they are allowed to offer to the client. (Remember from my article on August 12 that brokers are legally obligated to put the B/D ahead of the client.) There is no Broker/Dealer that will give their broker free rein to recommend or sell any product that the broker wishes. In many cases this is good because the B/D supposedly has done their due diligence but that's not always true either. On the other side of the spectrum, there may be a fantastic low-cost product that would be perfect for the investor but because it doesn't offer a proper compensatory arrangement to the B/D, that product is off limits to the broker and his clients. Then there's the administrative morass when a broker changes B/Ds, whether voluntarily or not.
In the last few years, dozens of B/Ds have shuttered their doors completely leaving their brokers (and clients) having to scramble to find another. Without a B/D, the broker has no way to make transactions or service accounts! And recently, one of the largest independent Broker/Dealers, Securities America, was sold by their parent company to another Broker/Dealer. That means that all of those brokers (about 1,900) and their clients will be, at least, be inconvenienced. But for those brokers that do more than just sell a few American Funds and call it a day, there will very possibly be the task of opening new accounts and moving assets. And not all investments will be acceptable to the new B/D which adds another complexity to this buyout. But the biggest conflict of interest I've seen so far is the initial public offering of LPL Financial.
LPL, the largest independent Broker/Dealer, went public recently, which I feel is the most anti-client move that they could have done. It is now legally the responsibility of the employees of this company to provide the most value to the shareholder - not to the client. And, yes, this means the brokers also. I'm certain that there are very many LPL brokers that are competent, well-meaning people, but the fact remains that the legal obligation of the board of directors to provide maximum value to the shareholders of the company, and therefore the processes and products that are provided must be those that benefit the shareholders of the company. And the broker, as a legal representative of LPL, must comply. In my career I've worked as an advisor with several B/Ds as well as being a coach to hundreds of advisors nationwide. I tell you now that what I say is based on decades of personal experience and observation. And that is why I choose to do business as a fee-only Registered Investment Advisor (RIA), unfettered by these conflicts of interest. I am free to choose the best tool for my client - period. What's your thought? Does the B/D model still make sense in this day and age? Why would you choose that route over an RIA in your area?