Pay-to-Play
by Richard
You may have read recently about the brewing scandal involving state pension fund managers pocketing money from asset managers bidding to manage public funds.
As always, where money and politics intersect, this is going to get very ugly.
And it may be just the tip of the iceberg.
I’ve long advocated for the discount brokerage firms, and have had accounts with Schwab, Fidelity, TD Ameritrade, E-Trade and Scottrade.
But you need to pay close attention when these firms trot out their “select” list of “independent” investment advisers for those clients who seek such assistance.
Fidelity (nicknamed “Fido” on the street) recently announced that they will begin charging financial advisers when the firm refers high net worth clients to them.
Fido had been a principled holdout…up to now. Schwab and TD Ameritrade already have their hand in the till, profiting from their referrals.
Where self interest is involved, ethics and conflict of interest are the first casualties.
You can expect a steady outpouring of rationalization and self justification for this move…but don’t even for a minute fall for it.
The culture on Wall Street is that the customer is above all else, a revenue stream to be diverted and bled dry and parsed out, like any other packaged investment, on terms that best suit the packagers and promoters.
It is even possible that a client might be referred to a high quality adviser, but then, that is entirely beside the point.
Both the sponsoring broker and participating adviser are parties to this compromised bargain, and any subsequent recommendation is forever tainted by the price tag buried deep inside the ultimate management fee.
Since this is yet another cost of doing business, it will ultimately be paid by the client.
There is no excuse or justification for such payola.
For one simple reason. Whenever there are kickbacks, rebates, or any other form of under the table, opaque and undisclosed compensation…the motivation is not to act as a fiduciary with the client’s best interests in mind.
It is simply to move the merchandise, after marking up the price.
If you are ever in the market for an independent adviser, you must ask this question…and get an answer in writing.
What compensation have you received, or will you pay, from any and all sources other than your client’s fee income…including but not limited to:
- Cash payments, deferred compensation, or payment in securities
- Subsidized office/staff expense
- Reimbursed advertising expenses
- Below market rate information technology and/or trade execution
This will make them squirm. Because pay-to-play is so deeply and covertly embedded in the investment/retirement complex.
