As if it were not difficult enough to make money by investing properly, the situation now is complicated by the fact that financial advisers, to an increasing extent, do not have the best interests of their clients in mind.
Working in that industry is highly competitive, so too many are resorting to tactics that are not helpful to investors.
The results obviously vary. According to anecdotal evidence some have had their portfolios decline drastically; that in the face of rising equity prices.
Nowadays some firms have quotas, contests and bonuses based on how much their advisers sell, not on satisfaction with the performance of the portfolio.
Quotas differ for firms. Some so-called full service brokerage firms expect each adviser – a term used for sales personnel – to bring in $5 to $10 million in new assets each year.
Others require perhaps a few hundred thousand dollars in commissions each year to earn a full payout of the commissions generated. Otherwise the payout could be reduced. One Toronto firm charged its sales personnel for rent or use of the telephone unless commissions reached a specified level.
These targets are not correlated to the client’s satisfaction. Thus, an investor may be told to switch from holding one bank to another for greater gains. This despite the fact that all chartered banks perform pretty much the same. Long-term holding is almost always in the client’s best interest, not churning an account for an adviser to earn a commission.
A mutual fund may pay sales personnel a one per cent commission on holdings, while another fund with a superior track record may pay only half that amount. There is a little incentive for the client to hold the inferior fund, but unfortunately, the adviser may opt for the fund that pays more commissions.
At various times it may be desirable to hold some cash in a portfolio, but of course that triggers no commissions. The adviser may be reluctant to recommend a cash reserve.
A few advisory firms recognize that providing a comprehensive financial plan and charging an annual fee based on the size of the account would be in the client’s best interest. Then success would lead to referrals and more accounts.
The corruption in the financial industry is widespread and distorts the entire economy. Once again, as in so many other instances, morality and integrity bring the best rewards for all concerned.