If your financial adviser put you into a mutual fund with higher fees and lower returns than others, just because the fund was paying him, would you be outraged? Turns out it’s perfectly legal. Even worse, it’s common. But some firms are disrupting the financial industry by providing a rare commodity: integrity.
By Vikram Rangala
Friday, March 4, 2016
A decade ago, a friend who was a top sales rep for a major pharmaceutical firm invited me to a dinner she threw for a group of doctors. The steaks were expensive, but what I remember was the doctors ordering round after round of Johnnie Walker Blue at $60 a glass. It was my chance to try it, but I was horrified when the head of the practice ordered them all on the rocks. Who waters down one of the world’s most expensive scotches? My spirits, you might say, were dampened.
Other than giving me that awful joke to retell, the evening gave me a glimpse into conflicts of interest for professionals whose business depends on trust. The pharma firm wanted docs to prescribe their new blood pressure medication. So they wined and dined them, took them on trips, and showered them with bling. Those were the days.
Seriously, those actually were the days. Pharmaceutical firms can’t do that anymore. It’s not hard to understand why this near-bribery was outlawed. If your doctor prescribes you a drug, you want to know it’s because of sound medical judgement, not free booze.
You’d think financial advisers, to whom you entrust your financial well-being and that of your loved ones, would be held to similar standards. But a new study from the University of Chicago and University of Minnesota found that 7 percent of financial advisers have been disciplined for putting clients in unsuitable investments, trading on client accounts without permission, and other shadiness. In many firms, 20% of advisers have been disciplined at least once, often four or five times. Most keep their jobs and 44% of those who are fired just move to another firm.
That’s just the ones who get caught. The worst of the problems is called “backdoor payment” and it’s just what it sounds like. If I’m your financial adviser, a mutual fund can pay me to get you to invest in their fund. They may charge higher fees and give you lower returns, which will cost you tens of thousands of dollars by the time you retire.
But I don’t have to tell you that. Why would I? The other, better fund isn’t paying me diddly. Thousands of financial advisers do this and it’s completely legal. The Department of Labor and Pres. Obama just announced a proposal to end backdoor payments and similar conflicts of interest.
So when you hear about some wealthy financial advisor, is it fair to wonder if he got rich in part from bogus fees and backdoor payments? If your new neighbor was a wealthy surgeon and a recent report had revealed that 1 in 10 surgeons perform unnecessary operations to make extra money, would you be as impressed by his new Tesla?
In any business, the malfeasance of some bad actors casts a shadow over everyone else. Being the most honest financial adviser in the business is a little like being the best surfer in all of Nebraska. It’s an accomplishment of sorts, but consider how weak your competition is.
The rise of no-fee stock trading services like Robin Hood suggests that there is a market for disruptive new models of market participation. And then there’s the popularity of services like Wealthfront and Betterment, which replace financial advisers with algorithms. When people would rather trust a robot with their money than you, you’ve got to question your professional credibility.
Nadex, the binary options exchange, which I work for, is another firm challenging the status quo by doing something so basic it seems radical. We are honest and fair. And believe it or not, we’re making money and growing fast.
Nadex is not a place to invest—our longest-term product is a weekly binary option. We are not in the financial advice business and don’t recommend trades or strategies. We just provide a CFTC-regulated exchange where individuals can do short-term trading on a wide variety of markets with low fees, limited risk, and a level playing field.
But the values that guide Nadex could well serve any company people trust with their hard-earned money—especially after the massive breach of trust that led to the crash of 2008-9. We are transparent with low, fixed fees. Nadex employees can’t trade on Nadex. We don’t recommend trades or strategies. Nadex, the company, never takes the other side of a member’s trade.
Most important, you define your maximum risk and reward before every trade. You don’t have to take some broker’s word for anything. Mainly because you don't need a broker—Nadex members trade direct to the exchange.
Okay, enough about Nadex. But we in this industry do not talk nearly enough about the value of trust—the sheer cash value of this scarce commodity. It used to be you could get away with things like backdoor payments and selling lousy investments to unwitting clients. And you might even get called a successful businessman. But now technology, in the hands of some disruptive young companies who find profit in being trustworthy, is making it dangerous to endanger your customers. And profitable to empower them.
Speaking of technology, use the BrokerCheck website to see how your financial adviser measures up. And use that Google machine to look up “fiduciary”: that’s a financial adviser who is required to help you without any conflicts of interest.
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