How to Hire (or Fire) Your Financial Advisor

The second major method of transacting in investments is via the Wirehouse brokerage firms who “broker” transactions. The primary fallacy is that brokers know something retail investors don’t. In some ways, this is true, but not in the area that investors prefer. Brokers are trained sales people in the skill of financial product distribution, and the money management industry (which creates the products they sell) spends hundreds of millions of dollars annually on that effort. The cost of the “education” of FAs is many, many tens of millions of dollars, sponsored by the self-serving interests of product manufacturers in poorly disclosed practice called “revenue sharing”.

Brokers, and their firms, are compensated on the buying and selling of securities of all varieties. When the brokerage houses also have investment banking operations, they are typically market markers too. A market maker does just that, provides an active trading facility for a particular security, often buying for their proprietary inventory in the process. Since these firms maintain inventory of securities, they can then make sales directly to client accounts – a perfectly ready and under-informed retail buyer. Combine this function with a broker’s portfolio construction proposal, and you have a perfect mechanism for inventory delivery. I don’t mean to disparage this function of market making, but rather to encourage challenge and audit over the broker’s motivations for making any trade recommendation.