Stockbrokers facing the general investing public, working for JP Morgan Chase, might have business cards with a title of “financial adviser,” but just like the people you meet when you walk into a car dealership, they are salespeople. They are rewarded when they meet their sales targets. Their bonuses are based on the clients they sign. And they put their own monetary goals, like earning those bonuses, before the needs of their customers.
Some financial planners are considered fiduciaries. They are bound by their ethics to consider a client’s needs and recommend the best investment products for each situation. The practice isn’t perfect even among fiduciaries, but with stockbrokers disguised as financial advisers, investors are bound to run into a variety of conflicts of interest. One of those conflicts arises when a financial institution selling investments also has their own products to sell, and the company’s own products are more profitable.
Walk into any supermarket, and the shelves include at least two brands for each product. Shoppers have a choice between store brands and name brands. Thankfully, I can shop for groceries without hearing pitches from salespeople for each product I put in my cart. If I had to go through a grocery broker from the store for each product, and if the store brand items were more profitable for the company than name brand items, I would expect to be pitched the store brand items, even if they were not nearly as good as the alternatives.
In the grocery store, sometimes the store brand version of an item is nearly identical to the more widespread brand. But that’s not the case when you evaluate mutual funds. The in-house funds and investment products salespeople at JP Morgan Chase were encouraged to sell were inferior to other products they offered, presenting lower performance and much higher fees. There’s no surprise, there. Many other large investment banks, however, like Morgan Stanley and Citigroup, no longer offer in-house funds and investment products to their advisory clients.
Just the fact that a broker doesn’t offer her or her own company’s investment products doesn’t mean they’re fully objective in their sales recommendations, however. Brokerages often receive kickbacks for recommending an external company’s investment products to its clients.
The only real solution is for individual investors, hoping to build wealth over the long term, to do their own research. Meeting with a Certified Financial Planner for some guidance can be a move in a positive direction, but each investor should take control of his or her own investments. From there, it’s simple. Fees are negatively correlated to investment returns compared to their benchmarks; if you want the best performance, choose index mutual funds with the lowest fees.
I knew that I wanted to invest in Vanguard’s low-cost index funds before I met with a financial planner. For its investors, Vanguard offers free meetings with a Certified Financial Planner who does not act as a salesperson. The CFP helped me formulate an investing strategy based on my assets today and in the future, and on my goals and concerns. We talked about stock funds, bond funds, and concerns about tax, and formulated a strategy that keeps my tax exposure low. When the plan was complete, I took the information and applied it to Vanguard’s own funds.
I could have used the plan with any company’s funds, even expensive, actively managed mutual funds, if I wanted. I did not just hand over money to this adviser and ask him to manage it for me, a sure way to spend more money than necessary and welcome the possibility of not even meeting benchmark returns.
There’s a possibility that I made mistakes. It’s impossible to say what the best decision is until years have passed and you have the benefit of looking back on the investments’ actual performance over time. Sticking with low-cost index mutual funds is very likely a better idea than trusting a salesperson with the task of looking out for you.
Published or updated July 3, 2012.