Greed in the News

    Too many advisers face ethical challenges

    Maybe it’s an indication of the End Days, or at least the start of a new bull market, but the news today had a number of events which all shared the common themes of greed and rampant ethical abuses among people in the  financial services industry.  Here  are the specifics:

    Commissions Are Addictive to Advisers

    If investors needed more evidence about the conflicting motives that drive their financial representatives, a new study finds that reps would rather take the commissions from fund companies and investment managers than provide objective advice.

    Based on a new survey by Charles Schwab of 210 non- registered investment advisers (RIAs), who managed at least $10 million in client assets, 40% of respondents said they would not go independent because they were afraid of losing their commission incomes.

    While the respondents said they were attracted by the idea of being their own bosses if they moved towards a fee-based business model (one in which clients pay an hourly fee for advice as opposed to receiving commissions and revenue sharing payments), only 8% said they would want to be compensated solely on a fee basis.

    About half said they would want to keep some of their commission-based business, and 20% said they wanted to keep all of their commission business.  If they did that, they certainly would not be considered fee-based advisers.

    The Schwab study shows that people who become fee-only based advisers have an entirely different mind-set then commission-based brokers.  Accepting commissions and revenue sharing have largely created the conflicts-of-interest that exist between advisers and clients.  This is the source of the problem about who debate the merits of accepting a fiduciary standard. The biggest obstacle is that the average investor does not even know they are commonly getting tainted, non-objective advice from advisers who value the commissions over the merits of a long-term client relationship.

    Customers With Less Than $100k Account “Not Profitable”: JP Morgan

    JP Morgan executives said that the bank cannot make sufficient profits from bank customers who have less than $100,000 in deposits in the bank.  The reason: they cannot generate enough fees to show a profit, especially after large banks, such as JP Morgan, have had their overdraft and debit card charges capped by federal regulators.

    Despite their huge size and vast array of product offerings, the nation’s largest banks thrive on fee revenues from customers who cannot balance their checkbooks.  One JP Morgan executive said the bank would “celebrate” if checking account fees could reach $20 at some time the future.

    The statements by JP Morgan and Bank of America executives about the importance of fees towards bottom-line bank profitability are an indicator of what should happen when 401(k) plan participants get a chance to see the fees they are paying as a result of the new upcoming DOL fee disclosure regulations.  These new rules, which go into effect in a few months, mandate that plan sponsors find out and publicly post the fees being charged to plan participants.

    Many plan sponsors will be surprised at what they are paying.  Their own employees will be even more shocked to see what they have been paying for all these years.  This could be especially shocking if employees expected their employers to be looking out for their benefits by finding the best products and services available at the lowest costs. Mutual fund companies and record keepers who charge these fees should also practice their conflict management skills.

    New Studies Finds Wealthy More Like to Cheat

    Just as Gordon Gekko, in the form of actor Michael Douglas, gets re-discovered for his new role as soliciting whistle blowers to contact the FBI for investment and financial fraud, seven new scientific studies finds that Gekko has a large following.

    As reported in Bloomberg news, the seven new studies found that wealthy people tend to expect more from society, even if they have to take it from the less knowledgeable or those less able to defend themselves.

    Among the results of the seven studies were that “upper-class individuals behave more unethically than lower-class individuals. In studies 1 and 2, upper-class individuals were more likely to break the law while driving, relative to lower-class individuals. In follow-up laboratory studies, upper-class individuals were more likely to exhibit unethical decision-making tendencies (study 3), take valued goods from others (study 4), lie in a negotiation (study 5), cheat to increase their chances of winning a prize.”

    For an abstract and link to the complete study, go here.

    In the financial services business, the high salaries and insular relationships that investment professionals have with their clients fosters many of these same behaviors.  That may help explain why conflicts-of-interest are so commonplace, tolerated and difficult to break.  But unlike the recommendation by the studies’ authors who suggested that ethics classes would help solve these problems, ethics classes taught to floor traders in the past have done little to  correct these moral and ethical problems.

    What the ethics classes did do is provide jobs for some ethics teachers, and to reiterate lessons taught in most non-sociopathic families that stealing creates problems.  The problem is that virtually no adviser ever gets penalized by their firms, even though they all have compliance officer and legal counsels at the highest executive levels.  That is how the financial services industry wants to run its business.  But investors should heed the old Roman saying that should also be affixed above the NYSE’s Corinthian columns on Broad Street: Caveat Emptor.

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    Chuck Epstein has managed marketing communications and public relations departments for major global financial institutions and participated in the launch of industry-changing financial products. He also has written by-lined articles for over 50 publications, five books and served as editor and publisher of nation’s first newsletter on the topic of using the PC for personal investing and trading. (“Investing Online, 1994-1999). He also is a marketing consultant, writer and speaker on topics related to investor protection and opportunities in the very dynamic cannabis industry. He has held senior-level marketing, PR and communications positions at the New York Futures Exchange, Chicago Mercantile Exchange, Lind-Waldock, Zacks Investment Research, Russell Investments and Principal Financial. He has won national awards from the Mutual Fund Education Alliance (MFEA) and his web site,, was named best small blog in 2009 by the Society of American Business Editors and Writers (SABEW).


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