The problem of financial services and dual registration

How the financial services industry can stop bullying its customers, part 2

Read part one here: Do you know if your broker is a bully?

Meeting Peter Mallouk

Nearly a year after the first edition Money: Master the Game was released, I was introduced to Peter Mallouk — an impressive guy, even by my standards. He is, by all accounts, the epitome of excellence in the wealth management world. Peter and his firm, Creative Planning, manage nearly $20 billion in assets and carry a number of prestigious accolades — including being the only wealth manager in history to have been ranked #1 Independent Financial Advisor in America by Barron’s three years in a row. And they are also now ranked the #1 Wealth Management Firm in America by CNBC for the second consecutive year. It’s great to see a true fiduciary topping the charts. Creative Planning’s typical client is the millionaire next door, but they also have an elite group that works the ultra-wealthy ($10 million or more).

Peter and his team, with a little arm-twisting from me, recently went from serving only higher net worth folks to opening up a new division to accept smaller accounts. His team will provide a complimentary second opinion to anyone and help them uncover the layers of conflicts, hidden fees and proprietary funds in their current scenario. A free second opinion from the #1-ranked firm is a no brainer, right?

Peter had asked for a meeting with me, knowing my passion for protecting clients and my commitment to real and absolute transparency in the personal financial sector. What he shared with me left me completely disheartened. After years of trying to educate millions of people on the difference between a broker and a fiduciary and stressing the need for a fiduciary standard, Peter showed me a mountain of evidence that many “fiduciaries” were exploiting a legal loophole to make additional revenue off unsuspecting clients.

How so? It turns out that fiduciaries can moonlight as a broker when it suits their pocket book. You heard me right. Somehow, regulators will allow advisors to be both a fiduciary and a broker through a process called “dual registration.” One foot in both camps. Talk about a wolf in sheep’s clothing. That’s like sitting in your doctor’s office and after diagnosing you, he prescribes you a medication that he mixes up in the backroom and sells at a profit! We would never accept such a conflict!

“It gets worse, Tony!” Peter carried on. “Some fiduciary advisors are actually receiving additional fees and kickbacks for directing people to specific funds under the guise of ‘shareholder services fees’ or ‘consulting fees.’ Or, in some cases, they have been so brazen as to sell proprietary products under different names where they made more money for recommending an inferior product!  And although disclosed in fine print, the client is unsuspecting.”

I was dumbfounded and disheartened, but I also know that we must empower people with knowledge they need to avoid these land mines.

How to find a firm that works for your best interest

There are lots of high quality firms out there, so I asked Peter to give people the criteria they need to first discover if they are working with a broker or not, and then how to make sure the fiduciary you select is operating solely in your best interests.

  1. Aside from making sure that the firm is registered with the SEC as a registered investment advisor, the most important criteria is to make sure that that person/firm is not affiliated with a broker dealer (and ask for it in writing.) This is the “dual registration” I explained above. (Tip: If the advisors website or email says “Securities offered through […],” you are dealing with a broker.)
  2. Make sure your advisor does not offer any proprietary funds. Some firms create their own products/funds to increase revenues and then put those products in their client’s portfolios. In other words, you may be paying a firm to advise you to buy their own products! If you are paying for investment advice, you deserve to expect that the advisor is selling you investments as well.
  3. Make sure the registered investment advisor is compensated based on a percentage of your assets under management — and never more than 1.25% in annual advisory fees for comprehensive financial planning. Preferably this number should be 1% or even less if you have substantial assets to invest. Be sure there are no “12b-1” fees, shareholder service fees, consulting fees or other “pay-to-play” fees.
  4. Make sure the registered investment advisor is not compensated for trading stocks or bonds. If you are a bond investor, the most flagrant fouls in this industry are the “markups” charged by the broker and the firm. (Tip: If your advisor says you pay no fees on your bond portfolio, beware! Ask specifically if any bonds are “marked up.”)
  5. Don’t just give an advisor your funds directly. You want to make sure that your money is held with a reputable third-party custodian, such as Schwab, TD Ameritrade or Fidelity, which offers you 24/7 online account access sends monthly statements directly to you. (Note: A fiduciary using a firm like ones named above to custody your investments is NOT the same as the retail branch of these firms.)
  6. When looking at an advisory firm, be sure the firm has educated and credentialed advisors on board. When you go to a doctor, you want to make sure they have the M.D. credentials to back it up. The Certified Financial Planner designation, CPAs and attorneys are all good qualifications to have on your financial team.

(Need help with what, exactly, to ask? Here’s a list of questions to help you find the best financial advisor possible.)

I also aligned myself with Creative Planning by becoming a board member and Chief of Investor Psychology. My mission is to help people from making poor emotional decisions during volatile times and help them connect to their core purpose so that they will take control of this area of life.

Peter and I wrote Unshakeable for these reasons. All of us aren’t really after “money” per se. We are after the emotion that money gives us. Freedom, security, comfort, contentment, or whatever it is for you. But what if we could tap into the emotion we really want, so that we enjoy the journey to financial freedom and not wait “until” before we give ourselves permission to have an extraordinary life.

Note: As part of their efforts to educate and empower investors, Tony and Creative Planning have launched “Second Opinion.” This program, which is available for free on Creative Planning’s website, analyzes a client or prospect’s financial statements to uncover potential red flags in their existing portfolios such as proprietary funds, high-commission products, underperforming funds and more.

Header image © only_kim/shutterstock

Tony Robbins

Tony Robbins is an entrepreneur, bestselling author, philanthropist and the nation’s #1 Life and Business Strategist. Author of five internationally bestselling books, including the recent New York Times #1 best-seller UNSHAKEABLE, Mr. Robbins has empowered more than 50 million people from 100 countries through his audio, video and life training programs. He created the #1 personal and professional development program of all time, and more than 4 million people have attended his live seminars.

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