Updated: Jul 16
"Something bad will always look good compared to something worse."
~ Doug Guernsey
In a world of thousands of mutual fund choices available to investors, you might be surprised how few are made available through brokerage firms. The truth is that those mutual fund companies who pay the highest fees to brokerage firms receive better visibility by their brokers.
Representatives (brokers) for brokerage firms, who are often compensated by commission, usually are required to fulfill only a suitability standard when choosing products for a client. This means they must have a "reasonable belief that the recommendations they make are suitable regarding the client’s financial needs and objectives", but their first duty is to the company they work for, not necessarily the clients they are serving.
Mutual fund companies will try to incentivize brokerage firms to sell their products through what's known as revenue-sharing agreements. Those firms will then urge their employed brokers to recommend only those funds. One way revenue sharing can be accomplished is by charging additional fees known as 12b-1 fees. These fees can cover a variety of services such as record-keeping, technology, and training, but they can also serve as compensation incentive for advisors to pick one fund over another, regardless of the fund's performance.
In March 2019 the Securities and Exchange Commission (SEC) settled charges against 79 brokerage firms for more than $125 million for failure to disclose payments they received for recommending certain mutual funds. SEC Share Class Initiative
Some of the largest violators were Wells Fargo, RBC Capital, LPL, and Raymond James. More than half of the $125 million settlement came from only 7 of the 79 firms. The SEC still has open investigations against several other firms.
Conflict of Interest
Although the SEC has yet to rule on the requirement to disclose revenue sharing, it is under their microscope and due to the pressure of the Department of Labor regarding fiduciary standards, many firms have made these disclosures available to investors. However, these disclosures are often hard to find and can easily be hidden within the hundreds of pages of compliance documents.
The December 31, 2018 Revenue Sharing Disclosure provided by Edward Jones states in the middle of the very first paragraph:
"We want you to understand that Edward Jones' receipt of revenue
sharing payments creates a potential conflict of interest in the form of
an additional financial incentive and financial benefit to the firm."
Further along in the document it goes on to say:
"...while Edward Jones financial advisors may sell, and our clients
are free to select, funds from many mutual fund families, we
predominantly promote mutual fund strategic product partners."
This sheds light on the sales practices by firms and the regulation authority that allows the conflict of interest to exist in the first place. With over 20 years of experience working in the brokerage world I can tell you first hand that the training and education that is provided to brokers are primarily conducted by the mutual fund sponsors on how to sell more of their products. So, if you are working with a broker, know that they are trained in the art of selling rather than advising and coaching.
This "training" coupled with the pressure to produce is a double-edged sword. Brokers must meet minimum production requirements, and there is constant pressure to increase individual production. Simply put, the more the broker sells, the greater percentage of commissions and bonuses the broker will receive, thereby increasing the level of conflict that already exists. This is known as the commission trap, and it is hard to escape.
The conflict doesn't stop there. Many firms are also dually registered as a "Hybrid" firm, which means individuals are registered under both FINRA as a licensed, non-fiduciary commission sales agent (broker) for the firm, and the SEC as a fiduciary IAR (Investment Advisor Representative). Investors are often left confused about who they are dealing with: a broker or a fiduciary?
Dual registration can easily blur the line between what's best for the advisor, and what's best for the consumer.
In February 2019, Guernsey Financial made the decision to leave the brokerage world. We had enough of the conflicts of interest, the blurred line between broker and fiduciary, and the never-ending pressure by the firm to peddle financial products.
Our founder, Clint Guernsey said, "When all is said and done, there are only two things that matter - your faith and your last name."
Guernsey Financial's Core Values:
Honesty - Our word is sincere and iron-clad.
Integrity - We are our word.
Coaching - Developing investors to be prudent and disciplined throughout a lifetime.
Education - The continuous pursuit of financial academic theory.
Accountability - The conscious and deliberate ownership of our actions.
We believe that these core values not only honor our clients but brings honor to our last name.
As a Registered Investment Advisor, Guernsey Financial is committed to the Fiduciary Standard - in all circumstances we put the needs of our clients above all other considerations.
Falling in Love with 1 Stock
by Mark Matson
Investing Reimagined is our quarterly investor coaching series that you can attend either in our office or online. The response from you has been overwhelmingly positive. Guernsey Financial commits to instill discipline for investors by providing ongoing coaching and education.
To RSVP for our next Investing Reimagined class, click below.
Be An Advocate
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If you answered yes to any of these questions, then you can be an advocate for those you love and care about.
Here's how simple it is:
1) Invite someone to join you at one of our upcoming events.
2) Forward this email to someone you care about.
Most people will not pursue these things without someone like you advocating for them.
Food For Thought with Ed & Doug - Thursday, September 26, 2019
Investing Reimagined - Friday, November 1, 2019
2nd Annual Tailgate Party - Saturday, November 9, 2019
Guernsey Christmas Party - Saturday, December 14, 2019