Manages Parisian Family Office. Began Wall Street, 82. Founded investment firm, Native American Advisors. Member, White Earth Chippewa Tribe. Was NYSE/FINRA arb. Conservative. Raised on Native reservations. Pureblood, clot-shot free. In a world elevated on a tech-driven dopamine binge, he trades from Ghost Ranch on the Yellowstone River in MT, his TN farm, Pamelot or CASA TULE', his winter camp in Los Cabos, Mexico. Always been, and will always be, an optimist.

Friday, August 26, 2005

Does your broker make you broker?

You may not know it or want to admit it, but your stockbroker is just a salesman. Sometimes, they go by the titles of financial consultant, financial adviser and financial planner to name just a few. Many of these sound quite similar to “investment advisor”---but there is a huge difference. Investment advisors, like Chippewa Partners which is a Registered Investment Advisor, have a fiduciary duty to their clients. That means they have a legal obligation to place the clients interests ahead of their own, and to clearly identify all sources of compensation, the amount of compensation and any potential conflicts of interest. It’s all laid out in the Investment Advisers Act of 1940.

A broker has no such obligation, unless the client has given him discretionary authority to trade without the clients’ approval. Many brokers, however, masquerade as investment advisers. Television is full of advertising which trumpets “objective” advice and makes the firms sound more like trust companies. The firms try to project an image of having a fiduciary duty without actually having one. But how can any salesman or sales organization offer truly objective advice. They can’t. Very few investors understand that a broker’s role is to buy and sell investment products. Never forget, the nature of broker’s compensation and the relationship with their employer can seriously diminish chances of having efficient, well-performing portfolios.

As an arbitrator for both the New York Stock Exchange and the National Association of Securities Dealers I have had plenty of opportunity over the last decade to look into the bowels of Wall Street brokerage houses. It’s not pretty. Every year I am more afraid for investors who don’t have the time or training to understand how brokerage firms operate.

Here are some things to consider:

Most brokers are paid by a formula that increases the broker’s portion of commissions and fees as revenue increases. Some brokers will sell anything to anybody before year-end to cross larger investment schedules that put them into a higher pay-out grid. And the products they will rely on the most are the ones with the highest fees and the highest commissions, such as variable annuities and “loaded” mutual funds. The situation is even worse if the broker is switching firms and is offered an increased payout for bringing clients to the new firm.

“Flipping” or “churning” of syndicate equity offerings is rampant. Brokers are paid far more to sell investment products that are syndicate offerings than stocks that have been trading for some time. If your broker is trying to get you to purchase syndicate offerings of stocks or proprietary products and then sell them soon afterward, watch your wallet. “New” investment products are usually money-makers for the firms and brokers, not for clients.

So-called separately managed accounts, a popular form of customized portfolio, can lead to unusually high fees. With these accounts, the broker charges a “wrap fee,” with the broker’s fee wrapped around the fee of the investment manager. And the broker’s fee is often a good deal more than the manager’s fee—sometimes twice as much. Total annual fees can exceed 3%. When the fee is debited from the account each quarter, the broker’s portion is not itemized, so the client is in the dark on exactly what the broker charged.

The brokerage industry’s alternatives to money-market funds are called sweep accounts, which are very profitable to the firms. They make much more money on sweeps than they would by farming out your cash to a money market mutual fund, like the Reserve Fund, which we use for clients’ at Chippewa Partners. A money-market fund has a fiduciary duty to provide the best rate possible for its shareholders, while a brokerage firm does not.

Stockbrokers worry about generating income for themselves, before worrying about your results. If they don’t, they lose their job even if market conditions warrant doing nothing with your portfolio. They still need to churn your assets. Also, your stockbroker’s fancy title is not awarded for achieving results for clients’, it is for generating big fees and commissions to his employer no matter how well your portfolio performed. Do you think it is responsible and prudent to trust your retirement and lifesavings to a salesman rather than a fiduciary like the investment management firm of Chippewa Partners?

For an independent, fee-only relationship-based alternative consider,
Chippewa Partners
Native American Advisors, Inc.
Dean T. Parisian, Chairman
(770) 772-1621
A Registered Investment Advisor, established in 1995. Alpharetta, Georgia

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