Why Your Advisor Should Be a Fiduciary: An Example

John Noonan Uncategorized

Fi·du·ci·ar·y (noun): an advisor who chooses to be held to the highest standard of the law such that he or she must do what is in their client’s best interest at all times.

In other words, put the client first. Period. Not sometimes. Not sort of. Just first. It’s hard to make a case for anything but. Would anyone prefer not having their advisor do what’s right by them? Yeah, it wouldn’t make sense to us either.

Yet after countless lawsuits, hundreds of Ponzi schemes, ages of jailtime, and a decent effort by the government to make positive changes (effective by April, unless changes are made), the business of putting clients second, or even third, is thriving.

Case in point: Merrill Lynch.

Their advisors are under financial pressure to recommend products that their clients may not necessarily need (Read the full story by the Wall Street Journal below). And while no one is under the obligation to buy anything, don’t underestimate the power of persuasion. So much of what we have, we don’t need – more tchotchkes, anyone? It’s reasonable to expect that some people will wind up paying for something that doesn’t help them – something that isn’t in their best interest. Something a fiduciary would never persuade them to buy. If it were in the client’s best interest, you’d hope the advisor would have already recommended it, new clients aside.

On the bright side, the DOL’s new fiduciary rule, even with all its limitations, is a step in the right direction, a cause for hope. But somehow, someway, bad advice will find a way to survive, if not thrive, as it does today. If you find that unacceptable, find a fiduciary, and take your own step in the right direction.


John & Bill


Merrill Brokers Get Ultimatum: Refer New Customers or Face a Pay Cut


Updated Dec. 7, 2016 4:22 p.m. ET

Merrill Lynch will require its brokers to make at least two client referrals to other parts of parent Bank of America Corp. next year to avoid a cut in pay, a move that comes as Wall Street brokerages try to drum up new business while avoiding the type of aggressive cross-selling tactics that shook Wells Fargo & Co.

At Merrill, brokers who fail to refer at least two customers in 2017 to other parts of Bank of America—including its online brokerage platform Merrill Edge, its retail bank and other units—will have 1% shaved from their take-home pay or deferred compensation, depending on how much they produce in fees and commissions, people with knowledge of the matter said. That is up from one referral this year.

The change comes as rival Wells Fargo & Co. continues to deal with the fallout from aggressive cross-selling practices that led to the opening of as many as two million retail-banking and credit-card accounts with fictitious or unauthorized information. Wells Fargo in September agreed to pay a $185 million fine federal and local regulators related to the cross-selling practices, though it neither admitted nor denied any wrongdoing.

Merrill, however, requires its brokers only to make a referral to another Bank of America unit, giving them credit regardless of whether it generates new business—a key distinction compared with the incentives that were offered to retail bank employees at Wells Fargo.

Two other big brokerages, Morgan Stanley and UBS Group AG, don’t have referral requirements on the books for 2017, although each offers incentive bonuses to brokers to collect new assets. Wells Fargo hasn’t detailed its brokerage compensation plans for 2017 yet.

Merrill executives unveiled the changes to its more than 14,000 brokers on Tuesday and said they would leave unchanged in 2017 the so-called pay grid, which accounts for the vast majority of a broker’s compensation by paying them a percentage of the fees and commissions they generate.

“When you have a referral that goes across business lines, it’s always a tricky thing,” said Alois Pirker, a research director at Boston consulting firm Aite Group. “There is a fine line. As soon as you put in place strong incentives and goals, you create conflict.”

Brokerages are likely to run into the problem further as they attempt to position their brokers as advice givers and away from stock pickers, an evolution that could gain pace if the Labor Department’s so-called fiduciary rule comes online in April as currently planned. Instead of pitching a stock or bond, brokers are encouraged to create financial plans, manage all aspects of a client’s balance sheet and recommend banking products.

Brokerage executives say they are requiring brokers to more fully document recommendations they make to ensure they are in a client’s best interest and can be defended if legal action is taken. The new fiduciary regulation requires brokers to work in the best interest of retirement savers and requires brokers to keep extensive records on why they recommended a specific product.

“Any cross-selling that is not done in the client’s best interest and whether the client actually needs the product, that’s when you cross that line,” Mr. Pirker said. “Firms can’t appear to be drumming up business for the sake of meeting targets.

Brokers face other conflicts, too, analysts said. For instance, Merrill, Morgan Stanley and others offer bonuses to brokers who collect new assets or persuade clients to take out loans. Such bonuses usually come in the form of deferred compensation, which can consist of cash, stock or both, and can add several thousand dollars to a broker’s pay.

Morgan Stanley allegedly went a step further, according to a complaint lodged by Massachusetts’ top securities regulator in October. Massachusetts alleged that Morgan Stanley offices in the state and in Rhode Island ran an internal sales contest that gave brokers as much as $5,000 for signing up new securities-backed loans in 2014, while playing down risks associated with the products.

Morgan Stanley has objected to the allegations and said clients consented to the loans after discussing the products with brokers. Morgan Stanley Chief Executive James Gorman told analysts on a conference call in October that it wouldn’t force the bank to change its approach to how it offers those products.

Meanwhile, Merrill’s compensation changes were welcomed by brokers who had seen more-severe pay modifications in prior years, the people said. For 2016, Merrill increased certain grid thresholds that would have caused some Merrill brokers to lose 2% to 8% of their base pay unless they increased the fees and commissions they generated. Before that, Merrill cut how much brokers were paid on accounts with less than $250,000 in assets to encourage them to work with bigger clients.

Rival Morgan Stanley is making deeper changes to its broker compensation next year. The bank told brokers last week it would raise some compensation-grid thresholds it uses to pay brokers by about 10% to encourage them to produce more revenue, as part of a broader effort to rein in costs and generate more revenue.

UBS introduced its pay changes for 2017 in June. The Swiss bank simplified its broker pay plan, increased cash payouts for teams that generate $1 million or more in fees and commissions and cut back the number of bonuses brokers can earn to focus on new assets gained and length of service.