Who comes first?

The client always comes first  when making investment decisions. To the extent that this is a profession. Professions are characterized by the application of specialized knowlege. Components are experience, ethics, and education.

Put it this way, the firm is looking for certain results. The moral dilemma, in terms of who get put first, is always yours, since you are a professional.

There are plenty of conflicts of interest. Figuring it all out is a big challenge. But it always comes down to you, your clients, your ethics. For the unethical advisor, the world can be a lonely place. How quickly the illusion of being part of a big fuzzy group is stripped away when a client registers a legitimate complaint.

Firms are corporations. Corporations can deliver things like organization, economies of scale, but never real human attributes like ethics - other than policies, which are often perceived as unfair or unfavorable by the public.

For example, if you focus on selling permanent life insurance, you will be paid a nice up front commission, and the client will endure a potential surrender charge.

From your point of view and the company, you invested time and energy into a long term commitment. From some analytical client's point of view, you sold them an expensive investment vehicle. Who is really right depends on (your) perception of suitability.

If you always put the interest of the client first, the worst thing that could happen is, you won't meet your quotas, and you'll be fired. Someone else will take over the fruits of your labor. The best thing that could happen is, you always put the interest of the client first, and you'll become a real personal financial professional who sleeps well at night. So when you get started in this career, choose your training firm and setting wisely.

[quote=planrcoach]

The client always comes first  when making investment decisions. To the extent that this is a profession. Professions are characterized by the application of specialized knowlege. Components are experience, ethics, and education.

Put it this way, the firm is looking for certain results. The moral dilemma, in terms of who get put first, is always yours, since you are a professional.

There are plenty of conflicts of interest. Figuring it all out is a big challenge. But it always comes down to you, your clients, your ethics. For the unethical advisor, the world can be a lonely place. How quickly the illusion of being part of a big fuzzy group is stripped away when a client registers a legitimate complaint.

Firms are corporations. Corporations can deliver things like organization, economies of scale, but never real human attributes like ethics - other than policies, which are often perceived as unfair or unfavorable by the public.

For example, if you focus on selling permanent life insurance, you will be paid a nice up front commission, and the client will endure a potential surrender charge.

From your point of view and the company, you invested time and energy into a long term commitment. From some analytical client's point of view, you sold them an expensive investment vehicle. Who is really right depends on (your) perception of suitability.

If you always put the interest of the client first, the worst thing that could happen is, you won't meet your quotas, and you'll be fired. Someone else will take over the fruits of your labor. The best thing that could happen is, you always put the interest of the client first, and you'll become a real personal financial professional who sleeps well at night. So when you get started in this career, choose your training firm and setting wisely.

[/quote]

I'll second that!

Most eloquently stated, Planrcoach!  Well said!

Too kind.

Planrcoach, 

Thank you for your insightful response.

matchbox

[quote=matchbox]

Who comes first, when making investment decisions: client or firm? 

How would a wirehouse firm react to an FA always putting a client first over the needs of the firm?

Client, give me a break.  Compliance will kill you otherwise.

Are you being asked to push something?  Details please.

[quote=matchbox]

Who comes first, when making investment decisions: client or firm? 

How would a wirehouse firm react to an FA always putting a client first over the needs of the firm?

[/quote]

Perhaps you could explain that further. For example "the needs of the client first" may mean to some people that you work (and thereby the firm) work for free. To others it may mean that your wirehouse example is somehow forcing you to use inappropriate investment vehicles. Can give us an example of a conflict of interest that is at a wirehouse that you wouldn't find in every channel, including RIAs?

[quote=planrcoach]

If you always put the interest of the client first, the worst thing that could happen is, you won't meet your quotas, and you'll be fired. [/quote]

I'd take issue with the word "quota", but that aside, you wouldn't fail to be a reasonable producer because you insist on "doing the right thing" by your client, you'd fail to be a reasonable producer because you weren't doing "the right thing" with enough clients.

IOW, the people who feel "pressure" to do the wrong thing to create production are in that position because they haven't succeeded in opening accounts, gaining clients and gathering assets.

[quote=mikebutler222][quote=planrcoach]

If you always put the interest of the client first, the worst thing that could happen is, you won't meet your quotas, and you'll be fired. [/quote]

I'd take issue with the word "quota", but that aside, you wouldn't fail to be a reasonable producer because you insist on "doing the right thing" by your client, you'd fail to be a reasonable producer because you weren't doing "the right thing" with enough clients.

IOW, the people who feel "pressure" to do the wrong thing to create production are in that position because they haven't succeeded in opening accounts, gaining clients and gathering assets.

[/quote]

I would second that!

But the best thing you can do is stay away from the wirehouses as client and as a producer!    

I'd take issue with the word "quota",  ...

Thanks, noted, I agree, and I like the focus on, "doing the right thing with enough clients".

But the best thing you can do is stay away from the wirehouses as client and as a producer!    

Not really. Since ethics resides with the individual producer, affiliation is secondary.

[quote=Greenbacks]

But the best thing you can do is stay away from the wirehouses as client and as a producer!    

[/quote]

[quote=planrcoach]

I'd take issue with the word "quota",  ...

Thanks, noted, I agree, and I like the focus on, "doing the right thing with enough clients".

But the best thing you can do is stay away from the wirehouses as client and as a producer!    

Not really. Since ethics resides with the individual producer, affiliation is secondary.

WELL SAID.

It is true that some people interpret “best interest of the client” to be free service, no commissions, whatever.  The best interest of the client is sometimes a matter of interpretation.  Some people feel that the only way it is in the best interest of the client is to be fee-only.  Some feel it means an A-share at a good breakpoint and let it ride, some people think it’s a 1% wrap because it somehow avoids conflict of interest.  I think as long as you follow the code of ethics, and do what you REALLY feel is right for the client (which does not mean “free”), then it’s not a bad decision.  But at minimum, you need to explain the various options and how you get paid on them.  The client needs to know what they are buying and what they are paying.

Well put. By the time you clearly explain all of the options, the client looks at you and says, "What should I do?".

 I have never had a problem with anything except (at this point, other planner's inherited clients) deferred sales charges and surrender charges. These really seem to grate on the public. Penalties don't fly when they happen.

"Free" services - it is in the client's best interest to have the advisor remain engaged in business.

It really comes down to the firm putting the rep in tough spot and the client in a vulnerable position. 

Does the rep keep his job by selling a high commision product or get fired for lack of production?

If the firm really cared about the rep or the client they would not put either one in this position!  

Stay out of the wirehouses they give all of us a bad reputation.  

[quote=Greenbacks]

It really comes down to the firm putting the rep in tough spot and the client in a vulnerable position. 

Does the rep keep his job by selling a high commision product or get fired for lack of production?

If the firm really cared about the rep or the client they would not put either one in this position!  

Stay out of the wirehouses they give all of us a bad reputation.  

[/quote]

That’s ridiculous.

[quote=Greenbacks]

It really comes down to the firm putting the rep in tough spot and the client in a vulnerable position. 

Does the rep keep his job by selling a high commision product or get fired for lack of production?

If the firm really cared about the rep or the client they would not put either one in this position!  

Stay out of the wirehouses they give all of us a bad reputation.  

[/quote]

The tension that you describe is very real, but it is economic. It must always be managed at the individual level, because firms will always tilt toward profit maximization, etc. The only hope for external control is regulation, education, choice, so on.

Regulation certain seems to have made some recent strides. I can see a scenario where some of the RIAs are cracked upon next - it may be partly necessary and partly political.

Reps may comprimise their own integrity to keep their jobs, but that would likely occur in many industries. Think of all the money all of us left on the table for integrity. Others here may have picked some of that money up - but it seems largely a thoughtful and conscientious bunch here. We can influence the profession.

[quote=planrcoach]

Regulation certain seems to have made some recent
strides. I can see a scenario where some of the RIAs are cracked upon
next - it may be partly necessary and partly political.[/quote]

RIA's won't face any crackdown since we start from a position of working for the best interests of the client at all times, vs working for the best interests of the firm at all times.

Don't forget the Merrill Lynch rule, RR's are just fancy order taker's, any financial advice is "purely incidental." That's not how you sell yourself to clients, but it is what they will say the firms legal ass is on the line. All they care about is an absense of gross malfeasance (the suitability test), not the best interests of the client.

[quote=AllREIT] [quote=planrcoach]

Regulation certain seems to have made some recent strides. I can see a scenario where some of the RIAs are cracked upon next - it may be partly necessary and partly political.[/quote]

RIA's won't face any crackdown since we start from a position of working for the best interests of the client at all times, vs working for the best interests of the firm at all times. [/quote]

Is that so? Doesn't that depend on how "best interests" is defined? Do you work for free? Do you simply give your clients a "how-to" book so they can do it on their own? Have you ever said to a client "Buy the Vanguard 500, re-invest the dividends and don't hire me"? Have you ever said "You know, there are plenty of RIAs that outperformed my shop over the past few years, and since you can't employ their better services here with me, you should fire me"? Ever see an RIA close its doors because they’ve come to the conclusion that while they’re profitable for themselves, other RIAs habitually provide their clients with better returns at a better price? How about an RIA that's ever said to a client "You know Bob, you have too much of your net worth here with us and our (fill in the blank; global growth, short term muni, large cap value) investment style and you should move some to the (again, fill in blank) RIA down the street that specializes in another area"?

[quote=AllREIT]Don't forget the Merrill Lynch rule, RR's are just fancy order taker's, any financial advice is "purely incidental." That's not how you sell yourself to clients, but it is what they will say the firms legal ass is on the line. All they care about is an absense of gross malfeasance (the suitability test), not the best interests of the client.

[/quote]

If you understand the business and the regulatory structure you know that "purely incidental" is a vestige of the difference in governing laws. The notion that one channel in this business is more concerned with a client’s well being or has an advantage in the arena of ethical behavior is just silly.

[quote=AllREIT]

[quote=planrcoach]

Regulation certain seems to have made some recent
strides. I can see a scenario where some of the RIAs are cracked upon
next - it may be partly necessary and partly political.[/quote]

RIA's won't face any crackdown since we start from a position of working for the best interests of the client at all times, vs working for the best interests of the firm at all times.

Don't forget the Merrill Lynch rule, RR's are just fancy order taker's, any financial advice is "purely incidental." That's not how you sell yourself to clients, but it is what they will say the firms legal ass is on the line. All they care about is an absense of gross malfeasance (the suitability test), not the best interests of the client.

[quote=mikebutler222][quote=Greenbacks]

It really comes down to the firm putting the rep in tough spot and the client in a vulnerable position. 

Does the rep keep his job by selling a high commision product or get fired for lack of production?

If the firm really cared about the rep or the client they would not put either one in this position!  

Stay out of the wirehouses they give all of us a bad reputation.  

[/quote]

That’s ridiculous.

[/quote]

So Mike you have never seen any one let go for lack of production?

Does a wirehouse keep a low producer because he does what is right for the client? If so how many have you seen?

Can any one on this forum look around there office and say they keep him/her on because they do what is right for the clients? They do not produce much, but management does not care the client comes first!

How many?

If the client truely comes first at a wirehouse there should be some rep in an office somewhere with low production and still has a job after 5 or 10 years.       

[quote=AllREIT]

RIA's won't face any crackdown since we start from a position of working for the best interests of the client at all times, vs working for the best interests of the firm at all times.

[/quote]

As an RIA, you are your firm.  For example, if an RIA takes a flat fee off of the client's assets and the client asks if he should liquidate some of his mutual funds to pay off his house, is that a conflict of interest?  If you say yes, then you lose the fees off of that money. If you say no, you keep your fees.  So, maybe no is the right answer, but it still benefits you.

Not to get into a philosophical debate, but NO ONE EVER DOES ANYTHING UNLESS IT BENEFITS THEM IN SOME WAY. I'm not talking just about money, it could be as simple as holding a door open for someone because it makes you feel better inside.

[quote=Greenbacks]

Does a wirehouse keep a low producer because he does what is right for the client? If so how many have you seen?

Can any one on this forum look around there office and say they keep him/her on because they do what is right for the clients? They do not produce much, but management does not care the client comes first!

How many?

If the client truely comes first at a wirehouse there should be some rep in an office somewhere with low production and still has a job after 5 or 10 years.       

[/quote]

This is Wall Street, not Sesame Street.  Even doctors can't stay in business just because they do good work for their patients.  They still have to make money to pay their bills. You must do what is in your client's best interest AND make money at it. You must do both.  If you don't, then one or the other will shut you down.

This is Wall Street, not Sesame Street.  Even doctors can't stay in business just because they do good work for their patients.

Classicly poetic humorous statement of the advisor's dilemma. Buffeted by Buffet and Wall Street - and Sesame Street.

So Mike you have never seen any one let go for lack of production? <?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

[/quote]

Of course I have, but that doesn't support your contention.

[quote=Greenbacks]

Does a wirehouse keep a low producer because he does what is right for the client? If so how many have you seen? [/quote]

What's missing in your equation is that ALL producers are expected to do what's right for the client. LOW producers are let go because they aren't doing what's right for enough clients. They've failed at gathering accounts, clients, relationships and assets, IOW being profitable WHILE doing the right thing. You've turned doing what's right, while failing to open accounts as a virtue. It isn’t.

[quote=Greenbacks]

If the client truely comes first at a wirehouse there should be some rep in an office somewhere with low production and still has a job after 5 or 10 years.       

[/quote]

That’s a complete non-sequitur. It’s like saying if management cared about clients they’d have brokers in their employment that “do the right thing” for clients, but have criminal records, or bankruptcy records or insist on wearing jeans and tee shirts to work.

Like I said, “doing the right thing” is a minimum requirement and it doesn’t excuse you from your obligation to have enough in assets under your belt to be profitable. Under your theory of management a guy “doing the right thing” who has a single client and generates $150 a year in production is entitled to a desk, chair, marketing and legal protection.

I’m just curious, but at your shop, would you keep someone on who “does the right thing”,  produces little and  is to your balance sheet a compliance liability?

<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Like I said, “doing the right thing” is a minimum requirement and it doesn’t excuse you from your obligation to have enough in assets under your belt to be profitable.

SO THE FIRM COMES FIRST.

Under your theory of management a guy “doing the right thing” who has a single client and generates $150 a year in production is entitled to a desk, chair, marketing and legal protection.

FIRM AGAIN COMES FIRST.

I’m just curious, but at your shop, would you keep someone on who “does the right thing”,  produces little and  is to your balance sheet a compliance liability?

AS AN INDY IF THEY WANTED TO THEY COULD. THEY ARE RESPOSIBLE FOR THERE OWN BILLS. THEY COULD WORK FOR NOTHING IF THEY WANTED TOO.

  WE DO HAVE AN ASSISTANT WHO WE HAND OFF LITTLE ACCOUNTS TOO. THE CLIENTS LIKE HER AND SHE DOES THE RIGHT THING. SHE IS NOT A LIABILTY SHE IS AN ASSET.  

[quote=Greenbacks] [quote=mikebutler222]<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Like I said, “doing the right thing” is a minimum requirement and it doesn’t excuse you from your obligation to have enough in assets under your belt to be profitable. [/quote]

SO THE FIRM COMES FIRST. [/quote]

No, Greenbacks, it doesn’t.

 Doing the right thing for the client comes first. If you can't do enough of that, you're gone. You don't have a right to be unprofitable just because you meet the minimum requirement of conduct. Who said having to do more than one thing ("do the right thing" AND do enough of it to be profitable) means that the first thing isn’t first?

[quote=Greenbacks][quote=mikebutler222]Under your theory of management a guy “doing the right thing” who has a single client and generates $150 a year in production is entitled to a desk, chair, marketing and legal protection.[/quote]

FIRM AGAIN COMES FIRST. [/quote]

See above. Doing the first thing (doing the right thing) isn’t the same as saying you only have to do one thing. I have no doubt in your current capacity you not only have to do the first thing, you have to do other things, like make a profit to keep the lights on. That doesn’t mean to me that your clients don’t come first. It means you have to do the right thing for plenty of people to stay in business. The same's true in a wirehouse.

[quote=Greenbacks][quote=mikebutler222]I’m just curious, but at your shop, would you keep someone on who “does the right thing”, produces little and  is to your balance sheet a compliance liability?[/quote]

AS AN INDY IF THEY WANTED TO THEY COULD. THEY ARE RESPOSIBLE FOR THERE OWN BILLS. THEY COULD WORK FOR NOTHING IF THEY WANTED TOO.

  WE DO HAVE AN ASSISTANT WHO WE HAND OFF LITTLE ACCOUNTS TOO. THE CLIENTS LIKE HER AND SHE DOES THE RIGHT THING. SHE IS NOT A LIABILTY SHE IS AN ASSET.  

[/quote]

You’re confusing the issue here. I didn’t ask if, in theory, an indy could work for free. (BTW, I doubt you’d take the time to do the required OSJ work for someone, much less risk the good name of your firm, out of the kindness of your heart) I asked you if YOU would hire someone with one client who did $150 in business?

As to being a liability, in this day and age, everyone who speaks with clients is a potential compliance liability. You don’t have to be doing anything wrong, there’s a cost to defending yourself even from frivolous lawsuits. There's also a cost, even if it's only in time at an indy, to make sure people are in compliance of industry rules.

Here's another way of considering it, Greenbacks.

Can you do the right thing for clients, but not have enough clients to do the right thing often enough to be profitable, and thereby lose your job?

yes

Is that equally true of indys as wirehouses?

Yes, the difference being at a wirehouse someone in the firm will show you the door. At an indy office some outside agency will just cut off your lights and phone.

If you fail to do the right thing for clients, but do a ton of production, can you lose your job?

You bet.

Is that the same for indys as for wirehouses?

Again, yes. At a wirehouse compliance will get you, even if a regulatory body gets you first. As an indy it will be a regulatory body that will get you, unless some else is your OSJ, in which case they should get you first.

Yes, the difference being at a wirehouse someone in the firm will show you the door. At an indy office some outside agency will just cut off your lights and phone.

I think we're all just peeing on each other now.  Each model has its own way of making money and charging the client.  You can "cheat" the client in ANY model.  In the commission model you can churn, deceive on MF commissions (A vs. B vs. C), etc...with the fee based model, you can simply collect 1% per year and not do crap for your client.  But that does not mean that ANYONE has to do that.    Perfectly ethical, profitable advisors exist in both worlds.  So do incompetent leeches.  There is nothing inherently wrong or unethical about either model.  The individual makes it or breaks it in both worlds.

Here's an interesting scenario nobody has talked about.  It exists in both worlds.  Prospect comes in with a portfolio from another firm.  Any firm.  It's not necessarily how you would have constructed it, maybe some underperforming funds, maybe a few laggard stocks.  Whatever.  But overall, not too bad.  You rip the thing to shreds.  You tell the prospect that their broker is awful (in so many words).  You do it in order to get the ACAT.  Is that right?  No, of course not.  But being Indy or being from a wirehouse or being from a regional or a bank or Wadell Reed or EDJ or Ameriprise or AGE or PRU does not really matter.  Any of those individuals are capable of those actions.  The structure of their paycheck is irrelevant. 

Here's an interesting scenario nobody has talked about.  It exists in both worlds.  Prospect comes in with a portfolio from another firm.  Any firm.  It's not necessarily how you would have constructed it, maybe some underperforming funds, maybe a few laggard stocks.  Whatever.  But overall, not too bad.  You rip the thing to shreds.  You tell the prospect that their broker is awful (in so many words).  You do it in order to get the ACAT. 

If the portfolio is decent or not, the prospect is shopping. Just educate them a little about what they have there.

What they are likely looking for is touch. (Or not too be touched too much. Nobody calls them, or somebody calls them all the time with transactions.)

You don't say anything about the other advisor, because that is the least tasteful thing about what is going on.

You just listen to them, educate them and get the next meeting to show them some options. If they come to the next meeting, they will become your client.

Everybody gets paid the same, and we are all selling the same stuff.

[quote=now_indy][quote=AllREIT]

RIA's won't face any crackdown since we start from a position of working for the best interests of the client at all times, vs working for the best interests of the firm at all times.

[/quote]

As an RIA, you are your firm.  For example, if an RIA takes a flat fee off of the client's assets and the client asks if he should liquidate some of his mutual funds to pay off his house, is that a conflict of interest?  If you say yes, then you lose the fees off of that money. If you say no, you keep your fees.  So, maybe no is the right answer, but it still benefits you.[/quote]

Not really, I charge hourly and prorate that against a custodianship fee's. Any conflicts RIA's face are de minimus compared to the bread and butter of A-share pushers.

Again, its the difference between a fiduciary responsibility and the Merrill Lynch rule.

Every mode of compensation has a conflict.  ALLREIT, charging hourly is fine, but don't you make more money from a client by billing 2 hours for 1 hour of work?   Ethical advisors treat their clients fairly.  An unethical advisor will remain unethical regardless of mode of compensation.

One area where fee-based fails clients is with insurance.  The best insurance products pay commissions.  This means that someone with an insurance need who sees someone and pays a fee ends up paying both a fee and a commission. 

[quote=mikebutler222][quote=Greenbacks]

It really comes down to the firm putting the rep in tough spot and the client in a vulnerable position. 

Does the rep keep his job by selling a high commision product or get fired for lack of production?

If the firm really cared about the rep or the client they would not put either one in this position!  

Stay out of the wirehouses they give all of us a bad reputation.  

[/quote]

That’s ridiculous.

[/quote]

AGREED.