Question of the Day – Brokers

Here’s today’s Question of the Day:

If your broker recommended a particular mutual fund family to you and then told you that his firm had a special revenue-sharing arrangement with that mutual fund family, would you still invest in that mutual fund?

I realize that MOST of the readers of this blog are do-it-yourselfers and would NEVER use a full-service broker. However, I still wanted to ask this question in light of an article ($)I read in today’s Wall Street Journal about Jim Weddle, the new head of Edward Jones. For those of you who may not be familiar with the story, Edward Jones recently settled a case (without admitting or denying guilt) for $75 million dollars for failing to disclose their revenue-sharing arrangements with mutual fund providers to their clients. They also agreed to pay $127 million to settle nine class-action lawsuits that were related to the scandal.

Revenue-sharing agreements are arrangements in which a mutual fund family pays the brokerage firm extra fees or commissions for selling their product. The brokerage firm then pays the brokers more commissions to sell that particular mutual fund. So, a broker may earn 4.5% commission for selling mutual fund “1” but earn only 4% commission for selling mutual fund “2.” Which fund do you think he wants to sell? In addition, lots of mutual fund families used to sponsor trips for those brokers who sold the most of their mutual funds. Isn’t that the same thing? My guess is that this little tidbit of information was never divulged to clients. “By the way Mr. and Mrs. Smith, this mutual fund sale just won me an all-expenses paid trip to Bermuda. Thanks for your business.” Not gonna happen. What I don’t understand is why Edward Jones was singled out for doing something that ALL FIRMS do (or did do).

I thought this quote by Mr. Weddle regarding the lawsuit was interesting:

The scandal eroded morale inside Jones and hurt the firm’s recruiting efforts, Mr. Weddle says. “We took it incredibly personally and felt it was difficult to communicate our side of things,” he says. “It is not like we set out to hide our arrangements but now we disclose what we do and then some,” he says.

They “felt it was difficult to communicate [their] side of things?” What could “their side of things” be?

Regardless, my advice is BUYER BEWARE!

6 thoughts on “Question of the Day – Brokers”

  1. No, I wouldn’t purchase the suggested mutual fund. But I wouldn’t be likely to purchase a mutual fund anyway. When has a corporation ever admitted guilt or accepted responsibility for their actions? They always maintain their innocence despite clear guilt just like people do – Ken Lay and Jeff Skilling come to mind.

  2. I guess “their side of things” is “a guy/gal’s gotta eat”. But the problem is that the customer may think they’re getting something free when they’re paying for filet mignon at the country club.

    This is also a wierd, fundamental issue with lots of people in traditionally “high trust” professions; they often don’t understand that people won’t just take their word that they aren’t being ripped off. And the trust issue works better, not worse, when all the cards are on the table.

  3. It’s a tough question as I’d first have to put myself in the shoes of a person who would trust another person to handle my money.

    My first response would be that I would analyze the mutual fund myself, asset class, expense ratio, etc. But someone who hires a person at Edward Jones most likely wouldn’t do that.

    I’ve been getting a lot of Ameriprise advisors on my blog posting about how “hey, we’re better than nothing and we’re helping the people we work with”.

    Perhaps true. But “better than nothing” is a far cry from striving to be the best and without conflicts of interest.

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  5. If the broker is affiliated with a registered investment advisor firm you can request their ADV-II form. This discloses how the firm is compensated for services.

    Should you reflexively decline investments which profit the broker? It depends. While the situation smells like a conflict of interest it is entirely possible that the investment is profitable for all concerned. I would look at the numbers and make sure that the recommendation seems sound. If the recommendation puts a disproportionate amount of the portfolio into said fund I would become suspicious.

  6. The reader is uninformed. 4 % verses 4.5% doesn’t take in consideration the internal cost which is higher on others shares vs. A shares. Writer shows his lack of sav. In respect to the trips, my rep is rewarded for diversifying my port not for the amount of funds he sells. You should look into the facts further. Except for its clients, I don’t think Edward Jones explained this so I agree with Mr. Weddle’s quote. All the real fact were not exposed in the press because Jones was censored by regulators (govt).

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