Discount Brokers Act Like Wall Street on Fee Conflicts

For those who think a fiduciary-type rule is unnecessary, think again.

The Wall Street Journal reported last week that “advisers at some of the biggest discount brokerage firms make more money if they steer clients toward more-expensive products.” That includes the big three discount brokers, Fidelity Investments, Charles Schwab Corp. and TD Ameritrade Holding Corp.

According to the Journal, for example, “Fidelity representatives are paid 0.04 percent of the assets clients invest in most types of mutual funds and exchange-traded funds,” but they earn 0.1 percent on investments that “generate higher annual fees for Fidelity, such as managed accounts, annuities and referrals to independent financial advisers.”

It’s hardly necessary to point out why such a compensation scheme is problematic. It means that representatives of broker dealers 1) are conflicted when giving investment advice to investors, and 2) have an incentive to recommend costlier investments over cheaper ones.

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About Those Hidden Fees Investors Pay

The Department of Labor is soon expected to issue its much-ballyhooed, much-anticipated, and, in some circles, much-loathed “fiduciary rule.”

This rule will require brokers who work with retirement accounts to act as, well, fiduciaries -– in other words, to put their clients’ interests ahead of their own. (Registered investment advisers are already held to a fiduciary standard.)

What could be simpler or less objectionable?

Yet brokers have fought the DOL’s fiduciary rule since it was first proposed last April. The rule is a small part of a larger sea change underway in financial services that will ultimately improve the quality and reduce the cost of investment advice, and brokers who are attempting to buck the trend will end up on the losing side of history.

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