Monday, April 19, 2010

How FINRA Registered Representatives Steal Your Money

It is now gettting to the point where I can almost guess how a typical Wall Street firm invests their client's accounts. It is patently obvious that they invest client's money in a manner that always benefits the firm and the FINRA regulated registered representative. Never does it benefit the client, in my opinion.

A case in point. I just received an account transferred from a major Wall Street firm. In this account, there were 7 mutual funds. On the surface you might think this was properly diversified if you only go by the names of the funds. The asset classes involved were:

Large Growth
Large Value
Small Cap Growth
Small Cap Value
High Yield Bond
Core Bond
International Value
Health Care Sector

There are however, a couple of problems. FINRA says that if you invest in mutual funds, that you should invest all the proceeds within one mutual fund family in order to get the commission breakpoints for the client. The breakpoints means that the client can pay less in commissions if they invest in one mutual fund family.

In this case, we have 7 mutual funds and 6 different mutual fund families. The reason this was done is because the FINRA regulated registered representative wanted to earn the highest possible commission that they could. Therefore, the way they invested this partcular client's money, the FINRA regulated registered representative earned the full 5.75% in commission on each mutual fund. If this FINRA regulated registered representative, instead would have put them all with one family, then they would have earned significantly less commission.

This is so typical and something that I see so often it is criminal in my opinion.

The other problem that I have with this is that the Wall Street firms have commission production quotas for all of their FINRA regulated registered representatives. No doubt, this client was the victim of someone trying to meet their Wall Street firm's quota.

The problem with quotas and revenue production requirements are that they benefit the Wall Street firm first, the FINRA regulated registered representative second and supposedly the client last. In this case however, this account was very poorly diversified and heavily weighted to equities, so it was of no benefit to the client in my opinion.

As readers of my book know, if you have 80 -100% invested in equities, then you can be assured that you will have significant volatility and a portfolio primed to take a big fall. Even after the recent comeback of the equities market, this account was still down almost 30%. Thirty percent! Like I said, this kind of advice is criminal in my opinion.

While this client was with this Wall Street firm, there is no doubt that churning inside the account occurred. Churning is where one 5.75% mutual fund was sold and another one from a different mutual fund family was bought. The purpose of course was to generate more commissions for the Wall Street firm and the FINRA regulated registered representative.

Welcome to the world of SUITABILITY. According to FINRA, this is all perfectly acceptable and meets their definition of SUITABILITY. If you are doing business with a Wall Street firm and a FINRA registered representative, then you can bet your bottom dollar you will be low man on the totem pole.

There is a better way. Work with independent registered investment adviser firms whose investment adviser representatives are subject to a FIDUCIARY standard. A FIDUCIARY standard is where the investment adviser discloses all conflicts of interests in writing, in advance and does things in your best interest. Wall Street firms have the money, so they blanket the airwaves with touchy feelly ads trying to convince you that they will look out for you. Sadly, most of America falls for these ads and does business with these Wall Street firms at a significant cost to their financial future.

No dual registered representatives either. A Wall Street firm's FINRA regulated registered representative may tell you that he or she is also an investment adviser representative for a registered investment adviser. However, this is a trap. The indisputable fact is that it makes no difference whether a FINRA regulated registered representative is also an investment adviser representative for a registered investment adviser. The reason is that these people still have commission and revenue quotas. They still have to meet their quotas to keep their job. Once again, this means the Wall Street firm benefits first, the FINRA regulated registered representative and dually registered investment adviser representative benefits second and you, the poor client last. My point is the client does not benefit at all by working with these Wall Street firms.

You need to get out while the getting is good. Move to a totally independent registered investment adviser firm with no Wall Street firm affiliation. You will be glad that you did.