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Someone looking for a personal financial
advisor has thousands of individuals to choose
from - over 77,000, according to the U.S.
Department of Labor. Surely, with this many
people competing to help you manage your finances,
you have a decent chance of finding someone
who can provide the guidance you need?
Unfortunately, the answer is no. When it comes
to securing the services of a knowledgeable
and objective financial advisor, the odds
are stacked against the American consumer.
Part of the reason for this is the sheer number
of Americans who need help - 77,000 advisors
amount to only about one for every 1300 households.
The supply of advisors is not equal to the
number of people needing their services.
The other reason is far more troubling. Simply
put, the business of providing advice about
personal finances is built on a fundamental
conflict of interest that arises from the
common practice of paying commission for the
sale of financial products. The compensation
of a financial advisor frequently does not
result from providing the best guidance to
his or her client, but rather from serving
the interests of the companies that supply
the commissions. This does not mean that you
can't get good advice from a commissioned
advisor - but it does mean that it is all
too easy and all too common to be steered
in the wrong direction.
On January 9, 2004, the Wall Street Journal
published a front page story that dramatically
illustrated what results from this system.
The story, by Laura Johannes and John Hechinger,
was headlined "Conflicting Interests: Why
a Brokerage Giant Pushed Some Mediocre Mutual
Funds." The story began:
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Like
many who bought poorly performing Putnam
mutual funds in recent years, Nancy Wessels
lost big. One of her investments, Putnam
Vista Fund, dropped 40% from when she
bought it in April 2000, near the stock-market
peak, until she sold it in May 2002. That
performance was worse than 80% of similar
stock funds.
What the 80-year-old widow's broker, Edward
D. Jones & Co., never told her was that
it had a strong incentive to sell Putnam
funds instead of rivals that performed
better. Jones receives hefty payments
—
one estimate tops $100 million a year
- from Putnam and six other fund companies
in exchange for favoring those companies'
funds at Jones's 8,131 U.S. sales offices,
the largest brokerage network in the nation.
When training its brokers in fund sales,
Jones gives them information almost exclusively
about the seven "preferred" fund companies,
according to former Jones brokers. Bonuses
for brokers depend in part on selling
the preferred funds, and Jones generally
discourages contact between brokers and
sales representatives from rival funds.
But while revenue sharing and related
incentives are familiar to industry insiders,
Jones typically doesn't tell customers
about any of these arrangements. |
Here is what is so disheartening about this
story: Edward D. Jones is widely respected
for what the Journal called "its advocacy
of conservative, buy-and-hold investing."
That a venerable firm with an admirable approach
to its business has been shown to be contaminated
in this way demonstrates that the conflict
of interest that results from commissioned
financial advisors is inevitably corrupting.
The problem can't be solved by avoiding stockbrokers,
either, because the vast majority of financial
planning practitioners are commissioned as
well. The commission-based system of compensation
pervades and persists because it is the easiest
means of extracting money from consumers for
financial products and services.
Financial firms know that if they wanted to
convert to an approach in which they earned
income only by providing comprehensive, unbiased
advice, they would have to spend more money
training their employees, and take more time
with customers - and find it harder to convince
their customers to pay straightforward fees.
It's far more attractive for them to continue
the commissioned-based system, where the amount
the consumer is actually paying is frequently
obscured.
At Moneycraft we have dedicated ourselves
and our business to serving only the interests
of our clients, and we do not accept commissions.
Our internet-based approach to the delivery
of our services enables us to charge fees
that are low enough to make our program attractive
to everyday individuals and families who need
help with their finances and appreciate the
fact that we have no ulterior motives, and
will recommend the most cost-efficient solutions
for their situation.
Worried about confidentiality
issues? >>> Go to Privacy
Policy for our guarantees and protections.
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