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Knowing How and What the Investment Advisor is Paid is Important

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More and more brokerage firms are getting in trouble for not disclosing all the payments and benefits they receive when they recommend a particular financial product and you buy it. Customers know that there is some payment to the firm, but too often they do not know about all the payments. This is very different from when you hire a lawyer, the full terms in writing will be provided to you. Everything in black and white, in one document is there. You would expect the same from the stockbrokers and investment advisors, too, since you are trusting them with all of your assets and retirement. But investment advisors don’t always disclose all of the payments and compensation that a stockbrokerage firm may be paid on your accounts.

How the broker or investment advisor is paid can make a difference in the advice that is given, the recommendations that are made. Particularly if a broker is receiving additional payouts, and a customer may be missing volume discounts, called breakpoints, which rocked the industry just a few years ago.

Recently, in a “targeted exam” letter, the Financial Industry Regulatory Authority (FINRA) the stockbrokerage firm’s self-regulator company, sent questions to investment firms about a broad range of compensation practices, from the common payouts, which determine how much of their annual revenue their brokers take home, to recruiting incentives and mutual fund fees. The questions also ask the firms about the compensation they receive from product sponsors and how they promote specific products or categories of products. These are crucial questions to investors, but rarely discussed when a broker makes a recommendation.

“The intent of this review it to continue our assessment of the efforts employed by firms to identify, mitigate and manage conflicts of interest, specifically with respect to compensation practices,” the regulator wrote in the example of the letter, as reported.

This is a follow-up to a report from October 2013 that looked at compensation practices more generally. “It is really designed to determine whether practices around compensation or certain products that are sold are being sold for the right reason and there are not compensation incentives that could lead to products being pushed to investors that are not in their best interest,” FINRA representatives said.

In this letter, Finra asks firms, for example, to “describe how current compensation structures balance short-term incentives for registered representatives and clients’ long-term interests.”

The letter also seeks information about production thresholds that entitle brokers to higher compensation or bonuses for generating more revenue, enhanced compensation tied to revenue from particular product types, how firms promote sales of specific products, and other concerns.

This compensation information may show a strong basis to support the move for a national declaration of the fiduciary standard on all investment advice. A fiduciary duty on investment advice is a stronger responsibility than the more standard argued by most brokerage firms, of suitability, which is still a challenge to justify with many of the investments recommended by firms.

As a customer, StockBrokerLawyer.com believes very strongly that you are entitled to know all of the compensation and payments that a broker earns based on your acceptance of the recommendation. Especially with the complex financial products of ETFs, mutual funds, variable annuities, and REITs, not knowing all the compensation means that you don’t know all the reasons the broker has for recommending the deal.


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