When Bad Wealth Management Happens To Good People

By: Steven Abernathy and Brian Luster

Nucky Thompson: First rule of politics, kiddo: Never let the truth get in the way of a good story.

Jimmy Darmody: You can’t be half a gangster, Nucky. Not anymore. . . Nucky, all I want is an opportunity.

Nucky: This is America, ain’t it?*

— HBO’s Boardwalk Empire

Fans of the HBO series Boardwalk Empire, will remember when Nucky, the boss, and Jimmy, the ambitious protégé, speak the night before Prohibition is enacted.  Despite Jimmy’s Princeton education, he discovers he won’t have a major role within the business, which happens to be organized crime.  Robust bootlegging operations in America between 1920 and 1933 provided easy cash for those willing to operate outside of the law.  And many were.  Jimmy’s question reveals his ambition—a desire to exploit opportunity.  But Jimmy’s observation (which became the series’ tagline), “You can’t be half a gangster,” reveals much more.  Jimmy sees Nucky for the man he is—posing as a model citizen at the women’s temperance league one moment; planning how he’ll grow his illegal operation in the next.  No one can be authentically both; the point isn’t lost on fans of the show—Nucky is 100% gangster.

What does Boardwalk Empire have to do with wealth management? Well just like you can’t be half a gangster, financial advisors can’t honor a fiduciary standard halfway. They either act exclusively in their clients’ best interest or they don’t.

At present, a financial advisor may hold two designations; this is called dual registration.  However, if that advisor isn’t committing to serve client interests 100% of the time, they are not a fiduciary.

Consider another industry for a moment.  When a buyer walks into a car dealership, a great salesperson 1) knows the product, 2) listens to what a buyer desires, 3) capitalizes on this information, 4) sells a car, and 5) earns a commission.  The dance between customer and salesperson is never in question.  Calling oneself an automobile consultant, assistant manager, or account executive fools no one.  The cultural joke of the “used car salesman” signifying the epitome of the huckster is well-trodden territory.  Yet his goal is transparent; sell and earn.  Within the financial services universe, salespeople may appear to be professional, unbiased advisors acting in the investor’s best interest. But appearances may be deceiving.

The Glass-Steagall Act was enacted in 1933, the same year Prohibition ended, to limit the relationship and activities between brokerage houses and banks.  Its repeal 15 years ago brought about a shift in both how these institutions do business and their obligations to customers.  Thus, the clear line between what the brokers did, (i.e. sell products) versus what banks did, (i.e., advise clients) was no more.

Today the law does require written disclosures; however, this typically shows up in the fine print of a lengthy legal document.  Many people skim or skip this and might unknowingly seek objective counsel from a salesperson.  Car buyers are likely to do research, visit a few dealerships, and determine what their money buys at each one.  Yet it’s nearly impossible to do the same kind of comparison shopping among financial products if: 1) it’s not clear the relationship is a buyer / seller relationship and 2) the seller is inexperienced in the professional investment landscape.

The investor who isn’t schooled in the subtleties of Wall Street nomenclature may see the cavalcade of “financial advisors” as similar breeds.  They’re not.  The distinctions between them may not be obvious; however, suitability versus fiduciary obligation needs to be understood.

Since 2008 there are fewer multi-national financial conglomerates.   Within some of their offices, it may be difficult to determine who does what.  And that’s what some of these companies count on.  As Nucky said, “Never let the truth get in the way of a good story.”

A confusing, crowded financial product landscape is fertile ground for a savvy salesperson to outline problems and then sell “solutions.”  The more “solutions” a customer buys, the more commissions, fees and bonuses the salesperson is likely to collect.  Just because a product is “suitable” does not mean it’s the cheapest, or the best, or aligned with an investor’s overall wealth goals.  One mutual fund with a 5% front-end load fee and a 2% annual management fee may be just as suitable for equity market exposure as another that comes with no front-end load and a 1% management fee.

A salesperson earning a living on commission could serve a client’s best interests—but it’s more likely, as in any commission-driven industry, the salesperson is cognizant of meeting his or her own goals (and/or quotas) first.  Fortunately there are people who are legally obligated to act in the best interest of clients including fee-only fiduciaries.  Most are fee-only.  Salespeople may be commission-only, or, accept commissions and fees.  When investors want the fewest conflicts of interest, fee-only advisors tend to be the best bet.  To be clear, not all financial services salespeople are unscrupulous.  However, only fiduciary Registered Investment Advisors (RIAs) are held to the fiduciary standard.

So how does an investor determine who is a fiduciary when the waters of Wall Street might appear murky?  Clear the proverbial water—as well as the air and ask:

Whose interests do you represent?

Are you self-employed, do you work for a firm, or, do you work for me as a fiduciary and advocate 100% of the time?

Can you disclose all compensation (for you or your firm) that my business will bring?

Are there any additional ways for you to gain compensation based upon our relationship outside of your advisory fee and the payment methods listed above?

Investors are tasked with determining the truth themselves; these questions are a starting point.

“The only thing your people and mine have in common, we both know what a dollar’s worth and if we can’t make it one way, we’ll make it another,” says Nucky in the Season 4 finale.  Boardwalk Empire is clear—part time criminals don’t exist.  Part time fiduciaries don’t either.

Brian Luster is a Managing Member and Portfolio Manager of a long/short US event-driven value-oriented hedge fund. Founder and Chief Executive Officer of a Multi-Family Office. Portfolio Manager of discretionary shareholder activist Separately Managed Account strategy. Author of 50+ articles covering investing and multigenerational asset management featured in such publications as Forbes, Barron’s, The Wall Street Journal, The Huffington Post, Private Air Magazine, The American Association of Individual Investors, Family Wealth Report, Medical Economics, Physicians Money Digest, Chiropractic Economics, Medscape, Practice Link, Practical Dermatology, Physicians Practice, Dental Practice Management, Buyside Magazine, and The Bottom Line. For more information, visit www.abernathygroupfamilyoffice.com.

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