Where Ethics Don't Exist

You take the blue pill and the story ends you wake in your bed and you believe whatever you want to believe. You take the red pill and you stay in Wonderland, and I show you how deep the rabbit hole goes. The Matrix It's probably overstating matters to say that the brokerage industry is like the alternate universe depicted in the 1999 movie The Matrix. But if my time training financial advisors has

You take the blue pill and the story ends — you wake in your bed and you believe whatever you want to believe. You take the red pill and you stay in Wonderland, and I show you how deep the rabbit hole goes. — The Matrix

It's probably overstating matters to say that the brokerage industry is like the alternate universe depicted in the 1999 movie The Matrix. But if my time training financial advisors has taught me anything, a significant number of reps are operating on a different psychic plane than most other humans. Indeed, it would be hard to overstate how willfully oblivious some are to the ethical considerations that are supposed to inform the way they deal with clients. One particular experience stands out in my mind as an illustration of this fact.

In a Galaxy Not So Far Away

I was educating brokers on the advantages of the fee-based model of brokering. My firm (a midsized regional), like many others, was encouraging its reps to convert as many clients as possible from a commission-based relationship to a fee-based one. Implicit and explicit in the training was this: Fee-based arrangements are not right for all clients, and it's unethical (and illegal) to advise unsuitable clients to convert to them. Still, it should come as no surprise that the needs of the client did not always come first.

One broker — a big-time producer — informed me that he knew all he needed to about fee-based arrangements: Both the broker and the firm make more money under them, and that was reason alone for him to push his entire client base to convert.

At this time a significant portion of this broker's accounts were still commission-based, so I relished the opportunity to change his scary perspective on conversions. On the day I began what I had hoped would be a long discussion with him about the ethics of converting clients to fee-based arrangements, our conversation was cut short because the broker had a tee time to make. As he headed out the door to his important business on the golf course, he introduced me to his sales assistant.

Miffed by the brushoff I'd just received — from a man who needed what I was selling, no less — I decided to take an in-depth look at the broker's accounts. Unsurprisingly, they told the same story as my conversation with him. In our brief conversation he'd explained that fee-based accounts needed to exhibit plenty of trading activity, lest clients wonder what they were paying for. In the accounts I viewed, I saw his theory in action with steady trading activity in accounts that did not appear to call for it.

In an attempt to identify the broker's buy-and-sell discipline, I asked his assistant how he was able to monitor each of the transactions with so many different discretionary accounts. The assistant laughed, then sighed at my question. Then she told me her marching orders: Buy and sell at least some portion of every account on a regular basis to ensure that each account had activity.

If It's Good for Me…

That some client accounts might deliver better returns by deploying a buy-and-hold strategy was not even an option. In short, it was a classic case of the tail wagging the dog, and the whole process made absolutely perfect sense to the broker.

Looking back on the experience, I know that on some level I failed in my job. I was supposed to help the broker see the light. I was supposed to convince him to behave more ethically. But this broker, and many others like him, live in another world — one in which his needs and those of the firm supersede those of the client. This irks me to no end, and my frustration eventually drove me from that job.

Or perhaps I should have just swallowed the “blue pill” like the rest of them.

Writer's BIO: Brittany Quaid is the pen name of a former mutual fund analyst from a midwestern RIA firm.

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