By Elizabeth Kolbert, The New Yorker http://www.newyorker.com/magazine/2017/ ... -our-minds
How investment broker dealers use sleight of hand to exploit 100 million Americans
‘Card manipulation’ is the branch of magical illusion that deals with creating effects using sleight of hand techniques involving playing cards.
While watching a magician at the Los Angeles Magic Castle, I saw a card manipulation pro do amazing tricks for a five year old girl. She was mystified and certain that what she saw was real and that magic is possible. Absolute wide eyed certainty was on her face. (Effect - how a magic trick is perceived by a spectator)
It reminded me of the schoolteacher I spoke to this week who was concerned about her investments.
Her advisor had put all her investment holdings into a fee-based account, where she was charged 2% each year to ‘manage and advise’ her.
Problem #1 was that she was being told to add 2% to her investment costs, every year. (2% compounded over the long term will cut your retirement funds by half, while putting the other half in the hands of your broker and dealer.
Problem #2 is that she had already bought and paid for all her investments and faced considerable fees and commissions to do so. Not to belabour the point but she had already paid for her investments.
Now the dealer had cleverly devised a totally new way to charge her again. To effectively give themselves on an ‘annuity’ based on every dollar in her account earning them a fee, every day of the year. If this does not meet the definition of abuse of market dominance, I am afraid nothing does.
Problem #3 was that the advisor was faking his license, while cleverly hiding the fact that he held only the salesperson registration, otherwise known as a ‘broker’. This ‘un-prosecutable fraud’ allows commission hungry salespersons to dupe investors by purporting to be licensed fiduciary professionals.
THE FAKE ADVISOR ‘HEAD FAKE’
“…financial advisor is generic term that usually refers to a broker By contrast, investment adviser is a legal term.”
These are not insignificant issues and yet they happen to millions of investors, without them being told of the scam.
She opened her computer in her home 1000 miles away and I opened my own. I walked her through the 30 seconds required to find the actual license/registration of her advisor.
I had to do this because without her actually seeing how the trick ‘worked’, something called ‘cognitive dissonance’ (fear of admitting/discovering we are easily fooled) steps in to assure most of us that we are too smart to be tricked so easily.
Most retail investors do not understand the differences between investment advisers and broker-dealers. They are forgiven for being in the dark, because the financial industry deliberately deceives more than 100 million North American investors.
Using sleight of hand, like a card shark or a con artist, the investment advisor of today is allowed to trick over 95% of American investors into a false sense of trust.
Imagine being allowed to lie to investors, in order to gain trust. This is the very same show that the con artist does for a living. Who knew is was standard investment industry practice as well? Who could even imagine? Magicians can. Securities lawyers can. Regulators can. But they are each bound to silence.
This investor was convinced that her advisor was real, that his skills were above her understanding, and that she was only protected if she placed herself and her family money in the hands of the advisor.
The trouble is that the advisor’(salesperson) who advises her on her money did not hold the professional standing adviser license and registration. Wait a minute…didn’t I already say that last line, just a moment ago?
It is time that I helped you spot the distraction. The magic of the con artist, or the magician is to weave a story based upon one or two facts, whilst distracting the audience in subtle and clever ways.
The distraction, performed in over 100 Million bank/broker/dealer accounts 
First, hide ones true license or registration from the customer, so they do not find out that you are a salesperson on commission.
Second change the title that you use by one letter, from the legally-meaning term “adviser”, to “advisor”.
That one clever ‘vowel movement’ allows a million commission sellers of stocks, insurance and mutual fund products to pretend to be SEC or state registered ‘advisers’.
It would be like having a career as a pharmaceutical company drug sales rep, and figuring out that one can easily triple sales if I portray myself as a Doctor. I gain greater trust, and more money by lying to my clients. Welcome to the standard daily practice of the 'self' regulated investment industry. See http://www.finra.org/about
One has a ‘do no harm’ oath, and the other sells products for commission. One charges approximately 1% and the fee is not subject to sales motivations or product incentives. One must work (by law) for the betterment of the client, and the other works (agency duty undisclosed) for the betterment of the dealer.
Train yourself to learn these key differences and how to spot the ‘trick’ being played on you, and one hundred million other Americans.
Product selling is not advice, and advice does not involve product selling. It is a clever hiding, of the agency duty, the duty to protect, serve and care for the customer, and hiding that a salesperson does not have this same duty to protect you. You are at the mercy of the #1 con in North America, while you are convinced that you are being served by a true professional. Do not feel bad. As I write this perhaps only 100 people in America even believe what I am saying, such is the power of a good con, to cause the victim to mentally ‘lock-in’ the impossibility of him or her being duped. That goes into a topic called ‘cognitive dissonance’.
For 600,000 commission sales brokers. http://www.finra.org/newsroom/statistics (The million number mentioned above also includes insurance and mutual fund registrants, many of whom operate outside the boundaries of FINRA)
After all, they work for a trusted financial firm, and they call themselves ‘advisor’. Isn’t it safe to assume that our government would not allow consumers to be lied to with such cleverness. Not it is not safe at all. Perhaps it was during the last century, but those days are gone.
Here are some of the links and backstory details for anyone who would like to dig a bit deeper. I hope that some readers will make a careful exploration of this material, and will contact me at firstname.lastname@example.org (in Canada) if you would like to correct anything here that needs correcting. I would be grateful for those who help me to better understand what I think to be the most costly consumer ‘bait and switch’ scam in the world today.
Bob Veres"When FINRA changed its name from the perfectly accurately descriptive “National Association of Securities Dealers” to the “Financial Industry Regulatory Authority,” many of us suspected that they had a pretty obvious agenda. The brokerage industry self-regulatory organization wanted to position itself as a regulator of everybody, including all fee-only fiduciaries, so it could impose a thousand paperwork-related obstacles to their business health and eventually put this silly idea of working for the customer to rest for good."
Bob Veres, a Financial Planning columnist in San Diego, is publisher of Inside Information, an information service for financial advisers. Follow him on Twitter at @BobVeres.
Everything below this point is a bit of a ‘reference source’ for my own use and as a ‘curator’ site to keep track of the related material. Read it at risk of being bored to death, and seeing me make notes and reminders to myself. My curator mind is not what it once was and I get deep enough into these stories at times to become quite lost. These notes are my signposts.
Many legally registered ‘advisers’ in the USA, also hold a broker license, which means they hold two different registrations, with two dramatically different duties to protect you the investor.
If you can imagine the comparison, it would be like working with a medical Doctor who was also licensed (and paid) as a pharmaceutical sales representative. They would have two invisible professional ‘hats’ so to speak, and they could switch hats back and forth while dealing with you depending upon whether it was in their financial interests to do so. That is a risk taken with the dually registered ‘broker-adviser’. Here is a video by Tony Robbins explaining in a couple of minutes how that might work against you financially. (OOPS! Video lost, please notify me if anyone can spot the location of an interview Tony did talking about financial persons who hold two difference license/registration categories, as he sums it up pretty well)
Ultimately it is this simple (according to Tony Robbins in the first 23 seconds of this video clip) If you have a fiduciary you pay the cost of money management ONLY. If not you pay commissions ON TOP of the cost of the money management. (The difference will cut your retirement by about half) https://youtu.be/23xWWsGp6vU
========================From US NEWS
Put another way, the question is not whether the dual-licensed broker-dealers are adequately regulated when they act as salespeople, but whether they are adequately regulated when they act as advisers. They get to have their cake and to eat it too. Those who claim to be ‘advisors’ get to eat your cake without even having the license they are claiming.....without even having the professional right to be in the room, so to speak. Hmmm.
What’s at stake, then, is not whether some clients will be able to get advice, but whether some financial professionals will be allowed to profit by giving bad, self-serving, advice. And there is abundant evidence of misrepresentation and obfuscation under the current rules.
In today’s world, workers and retirees face investment decisions that are, at once, deeply confusing and crucially important. In the absence of fiduciary standards, many people will put their trust in salespeople masquerading as trustworthy financial advisors. And many will make huge mistakes as a result – mistakes that can cost tens or even hundreds of thousands of dollars over a lifetime.
When retail investors seek advice from a financial professional, they generally assume that the professional is acting on their behalf. It makes no sense to insist that some professionals live up to that expectation, while letting others exploit it.
http://www.usnews.com/opinion/economic- ... retirement
Advisor has an ‘o’ in it, which should remind you “Uh Oh…somethings wrong”, or simply NO!
Adviser has an ‘e’, which should remind you of the words, “Legal”, “Excellent!”, or simply “YES!”
======== Below this point are links, sources of additional reading for those who wish to dig a little bit deeper into this topic=======
Investment Advisers: An investment adviser is a fiduciary whose duty is to serve the best interests of its clients, including an obligation not to subordinate clients’ interests to its own. (please note that the law in the U.S. and in Canada specifies this term as spelled with ‘er’ at the end)
This is the type of person you have looking after your money, if you have institutional money or are a serious retail investor.
Over 11,000 investment advisers are registered with the State or Securities Exchange Commission (SEC).
As of September 30, 2010, Commission-registered advisers managed more than $38 trillion for more than 14 million clients.
$38 Trillion dollars invested at less than 1% in professional (fiduciary) management expenses, adds up to about $380 billion in investment costs being paid to manage that dollar figure.
(probably will be much less than 1% overall, I have seen institutional money management costs as low as 0.25% on the large accounts) (in the billions)
As of the end of 2009, FINRA-registered broker-dealers held over 109 million retail and institutional accounts. That is almost ten times more investors than have the benefit of a truly licensed professional money manager. (adviser)
These poor retail, mom and pop investors end up with a sales guy, putting on a facade of a professional money manager, adding 2% to 4% additional fees to the costs of whatever investments you own, while STILL having to have the 1% costs of a real professional money manager. I standby waiting to be proven wrong in this point. THIS is the retail investment industry whirlpool that I was caught in for two decades.
It seems that the SEC cannot say (print, speak, warn, publish) the word “Advisor” since it legally does not exist. (there may also be other reasons) Sure you can go and look it up in the dictionary….and convince yourself that it means the exact same thing no matter how you spell it…..but please consider the possibility that the Securities industry has lawyers who have an entirely different view. (or simply insert your own cognitive dissonance here)
I talk to hundreds of industry experts each year, and can count on the fingers of my two hands how many of them are not caught in this cognitive dissonance. Caught in the ‘Effect’ of the con.
The existing securities regulatory scheme that allows broker-dealers to conceal their sales roles, does not offer adequate investor protection when dealing with broker-dealers, since under a suitability standard they generally remain free to put their own interests ahead of those of their customers. They do this part (the concealment) in secret.....like any magician would.
Investors do not distinguish between broker-dealers and investment advisers, do not know that broker-dealers and investment advisers are subject to different legal standards, do not understand the differences between a suitability standard and a fiduciary duty.
This is the natural result of regulatory policy that has allowed brokers to rebrand themselves as advisers without being regulated as advisers.
As the SEC staff stated in the 913 Study, “Retail investors are relying on their financial professional to assist them with some of the most important decisions of their lives. Investors have a reasonable expectation that the advice that they are receiving is in their best interest. They should not have to parse through legal distinctions to determine whether the advice they receive was provided in accordance with their expectations.”
Broker-dealers who wish to avoid regulation under the Advisers Act could do so by limiting themselves to transaction-specific recommendations while avoiding holding themselves out as advisers or as providing advisory services. In order to ensure clear communication to investors, it may also be necessary for the Commission to require some sort of affirmative disclosure in such circumstances to the effect that the broker-dealer is acting solely as a salesperson and not as an objective adviser. Broker-dealers who complied with these conditions would in effect have a safe harbour from Advisers Act regulation.
Brokerage firms would then face a clear business decision: do the benefits of offering advisory services and marketing themselves accordingly outweigh the costs of regulation under the Advisers Act? Faced with a similar decision when the courts determined that fee-based accounts were advisory accounts, most broker-dealers chose to accept regulation under the Advisers Act.
Investors would also benefit even if certain broker-dealers chose to avoid Advisers Act regulation if the result was that those broker-dealers stopped characterizing their services as advisory services when making recommendations that are not required to promote the best interests of the customer.
This approach would also preserve investors’ ability to choose to receive transaction-based advice subject to a fiduciary duty or non-advisory transaction-based services subject to a suitability standard, and their ability to distinguish between those different types of services would be enhanced.
An important aspect of a broker-dealer’s duty of fair dealing is the suitability obligation, which generally requires a broker-dealer to make recommendations that are consistent with the interests of its customer.
FINRA has primary responsibility for examining broker-dealers. (Financial Industry Regulatory Authority)
For my money FINRA should more accurately be titled FISRA (Financial Industry Self-Regulatory Authority)
Broker-Dealers: The Commission and FINRA oversee approximately 5,100 broker-dealers. (160,000-plus branch offices exist beneath this network of broker-dealers)
As of the end of 2009, FINRA-registered broker-dealers held over 109 million retail and institutional accounts. Approximately 18% of FINRA-registered broker-dealers also are registered as investment advisers with the Commission or a state. Most broker-dealers receive transaction-based compensation.
Retail investors are over 95% more likely to be funnelled into the ‘chute’ of the facade ‘advisor’ than to obtain the services of a licensed professional adviser.
Investment Advisers (FINRA)
"Although most people would use an "o," we purposely spell adviser with an "e" when we talk about investment advisers. That’s because the laws that govern this type of investment professional spell the title this way.” (quote by FINRA about the legality of “adviser”....while they regulate ‘brokers’ only...who represent themselves as ‘advisors’....which has no legal standing anywhere.....but hey, self regulation is great)
Many investment advisers are also brokers—but these two types of investment professional aren’t the same.
THERE ARE FIFTEEN TIMES AS MANY BROKER-DEALER OFFICES AS THERE ARE ADVISOR OFFICES
160,000-plus branch offices of broker-dealers vs advisory firms (11,100) fifteen times as many broker offices as adviser
nearly 90 percent of investment adviser representatives are dually registered as brokers. (don’t even get me started on the potential for dual-personalities problems....)
FINRA’s market surveillance systems process approximately 50 billion market events on average each day
http://www.finra.org/newsroom/speeches/ ... nterprises
“160,000-plus branch offices of broker-dealers”
http://www.fi360.com/blog/post/fiduciar ... moY5m.mjjo
Thankfully, Michael Kites can say the word “advisor” with some context about how it is used in US retail investment circles:
If the broker’s investment advice was “solely incidental” to the implementation of brokerage services, the broker didn’t have to register.
Notably, though, the ’40 Act actually did not directly impose a fiduciary duty on such investment advisers. Technically, Section 206 of the Act – also known as the “anti-fraud” provision – merely requires that investment advisers not engage in any acts that are fraudulent, deceptive, or manipulative. It was only later, in the 1963 Supreme Court case of SEC v. Capital Gains Research Bureau, Inc., that these provisions were interpreted to mean that investment advisers owed a fiduciary duty to their clients.
THEREFORE, IF A BROKER STAYS UNDER THE RADAR BY CLAIMING THAT HIS OR HER INVESTMENT ADVICE IS “SOLELY INCIDENTAL” TO THE TRADE…(which may have been the case in the last century)..THEY CAN IN EFFECT BE “EXEMPT” FROM THE REQUIREMENT that investment advisers not engage in any acts that are fraudulent, deceptive, or manipulative.
Over the next 20 years, the scope of brokers providing advice expanded even further, and in an effort to cut down on brokerage industry conflicts of interest the SEC-directed 1995 Tully Committee on Compensation Practices recommended that brokers begin to shift compensation towards ongoing AUM fees, leading the SEC in 1999 to propose the now-infamous rule for “Certain Broker-Dealers Deemed Not To Be Investment Advisers” (finalized in 2005). This so-called “Merrill Lynch” rule would have allowed brokers to offer fee-based accounts – otherwise a form of “special compensation” – but without being required to register as investment advisers, as long as any advice they gave was still solely incidental to the brokerage services and the account was disclosed to be a brokerage and not advisory account.
THIS RULE ALLOWS BROKER DEALERS TO PUSH FEE BASED AND PROPRIETARY (HOUSE BRAND) PRODUCTS but without being required to register as investment advisers.
Michael explains it best how people have snuck up, on the advisor gambit….
https://www.kitces.com/blog/is-the-sec- ... t-of-1940/
You would think the “incidental advice” rule in the 40 Act would be enough for the SEC to solve the dilemma of the fiduciary standard, a controversy stemming from the fact non-Registered Investment Advisers are allowed to skirt registration by calling themselves “advisors.”
the SEC hasn’t enforced its own rule regarding the provision of investment advice.
For want of a single vowel, the broker industry appears to have seized upon the Holy Grail of loopholes.
By referring to themselves as “advisors” rather than “advisers,” they have duped the SEC into believing their bread-and-butter business is merely “incidental” to their standard business model.
http://us1.campaign-archive2.com/?u=275 ... 29365276cb
Second, enforce the 40 Act’s incidental advice rule and stop allowing brokers to call themselves “advisors,” or worse yet, “advisers.”
Clearly a person calling themselves an “advisor” is directly, overtly, and purposefully providing advice; it is not ancillary or “incidental” to providing other services.
The public is confused by who is a fiduciary and who isn’t (whether they know or understand the term is not the issue – they do intuitively understand the concept).
They do have a fiduciary obligation, but as an agent of the brokerage firm this obligation is to their employer! This is not tough stuff. It is something the SEC could do tomorrow.This is understandable, since the SEC allows anyone with a brokerage or insurance license to call themselves an “advisor.” How can the public possibly know that their “advisor” is really less an adviser and more a salesman working first for the employer who pays them based on the advice they give.
http://fiduciarynews.com/2015/12/exclus ... gn=121715z
http://blog.ourfinancialsecurity.org/20 ... -advisors/
This one simple step has the potential to deliver large benefits to retirees and investors. It is also, very plainly, the right thing to do. When retail investors seek advice from a financial professional, they generally assume that the professional is acting on their behalf.
It makes no sense to insist that some professionals live up to that expectation, while letting others exploit it.
When Salespeople Call Themselves Advisors
Updated rules are needed to prevent financial professionals from swindling ordinary Americans.
Saving for retirement is extra-hard these days, and not just because wages are low and millions of Americans are still struggling to make up for ground lost after the 2008 financial crisis. All too often, the difficulty is compounded by gaps in the rules for the financial professionals who provide retirement-planning advice.
As things now stand, too many of those professionals can present themselves as (and enjoy the benefits of being perceived as) advisors with your best interests in mind, yet go ahead and recommend investments that will generate more money for them, and less for you.
It’s a huge problem, and the Securities and Exchange Commission and the Department of Labor are each in a position to fix important pieces of it. The SEC’s part goes back to a 1940 law which gave registered investment advisors a fiduciary duty to look out for the best interests of those they serve, while treating broker-dealers as salespeople with only a looser obligation to recommend “suitable” investments. The Labor Department entered the picture in 1974, when the Employee Retirement Income Security Act authorized it to regulate employer-sponsored retirement plans and some of the professionals who help people make decisions related to those plans.
Nowadays, brokers frequently act as advisors, providing “investment planning” or “retirement planning” expertise; yet the SEC continues to define and regulate them as salespeople. The Labor Department sets a stricter standard for some forms of advice, but its rules, which have not been updated in 40 years, are narrow, excluding many of the situations that matter most, such as advice given to employees about what to do with their 401(k) money when they retire or change jobs. Far too often, the record shows, financial professionals take advantage of the wiggle room between perception and regulation to promote high-commission investment products over alternatives with lower fees, better returns or fewer risks.
FINRA also refers to advisers only with an “E”, and brokers are the only other registration category.
There is no legally meaningful term for advisor, other than to intentionally mislead investors into a false trust.
even http://www.nasaa.org/22870/informed-inv ... providers/ cannot say the word “advisor”
And yet over 100 million American investors deal with something which is often called an “Advisor”. Why is that? WHAT is that?
What I really would like to know is how does any industry ‘regulator’ (an impartial referee) come to have $2.3 Billion Dollars in the bank???
Click on image to enlage or zoom in
source doc, http://www.finra.org/sites/default/file ... IR_AFR.pdf
page Nine of FINRA 2015 Year in Review and Annual Financial Report
FINRA Newsroom shows that they regulate over 635,000 brokers at 3,900 securities firms
These people are salespersons, almost always selling on a commission
http://www.benefitspro.com/2015/08/14/w ... 1487645225 testimony to congress
http://consumerfed.org/wp-content/uploa ... Report.pdf
Financial Advisor or Investment Salesperson? Brokers and Insurers Want to Have it Both Ways https://www.thestreet.com/story/1395820 ... -ways.html
Larry ElfordOf course the financial industry is the new deception industry....the ‘tobacco’ of the 21st Century.
Current State of the Investment Adviser and Broker-Dealer Industries
[/size]Investment Advisers: Over 11,000 investment advisers are registered with the Securities Commission. As of September 30, 2010, Commission-registered advisers managed more than $38 trillion for more than 14 million clients. In addition, there are more than 275,000 state-registered investment adviser representatives and more than 15,000 state- registered investment advisers. Approximately 5% of Commission-registered investment advisers are also registered as broker-dealers, and 22% have a related person that is a broker-dealer. Additionally, approximately 88% of investment adviser representatives are also registered representatives of broker-dealers. A majority of Commission- registered investment advisers reported that over half of their assets under management related to the accounts of individual clients. Most investment advisers charge their clients fees based on the percentage of assets under management, while others may charge hourly or fixed rates.
Broker-Dealers: The Commission and FINRA oversee approximately 5,100 broker-dealers. As of the end of 2009, FINRA-registered broker-dealers held over 109 million retail and institutional accounts. Approximately 18% of FINRA-registered broker-dealers also are registered as investment advisers with the Commission or a state. Most broker-dealers receive transaction-based compensation.
Investment Advisers: An investment adviser is a fiduciary whose duty is to serve the best interests of its clients, including an obligation not to subordinate clients’ interests to its own. Included in the fiduciary standard are the duties of loyalty and care. An adviser that has a material conflict of interest must either eliminate that conflict or fully disclose to its clients all material facts relating to the conflict.
Today, the more than 11,000 advisers registered with the Commission manage more than $38 trillion for more than 14 million individual and institutional clients.
In addition, there are more than 275,000 investment adviser representatives registered in the applicable states and more than 15,000 state-registered investment advisers.
As of the end of 2009, broker-dealers held approximately 110 million customer accounts.10 Currently, the Commission oversees approximately 5,100 broker-dealers11 with over 600,000 registered representatives engaging in a variety of business activities, which may or may not include the provision of personalized investment advice or recommendations about securities to retail customers. 13 Of the 5,100 registered broker-dealer firms, 985 have indicated on Form BD that they engage in, or expect to engage in, investment advisory services constituting one percent or more of their annual revenue.14
A Quick Note on Independent Broker-Dealers
A firm qualifies as a broker-dealer if it trade securities on its own account – that is, for the benefit of the firm itself – and also completes trades on behalf of its customers. Firms that only trade for their customers are simply called brokers and are not considered for this ranking. Among broker-dealers there are two major business models. The first is known as a wirehouse broker-dealer, in which a traditional securities firm offers its own financial products and services to investors. The largest wirehouse broker-dealers include powerhouse names such as Merrill Lynch, Morgan Stanley (NYSE: MS) and Goldman Sachs Group Inc.. (NYSE: GS).
Read more: The Top 25 Broker-Dealer Firms for 2016 (LPLA, AMP) | Investopedia http://www.investopedia.com/articles/fi ... z4ZOQYCypJ
http://www.wealthmanagement.com/busines ... ra-license (a good industry-inside resource piece about dual-license registrants...why hold both) Useful for researchers who seek to understand what the industry is doing and why.