Why I Quit Working for Commission-Based Brokerage Firms

Thirty years ago, I decided to change my life’s trajectory and center my career around helping individuals make better financial decisions. Up to that point, I had been working as a certified public accountant, which was an honest and steady job, but not terribly inspiring. I wanted to be on the front end of financial decision-making; I wanted to guide others to make evidence-based choices.

When I switched career paths in 1988, I had a vision of becoming a combination of a coach, a counselor, and a trusted mentor. What transpired was much different.

I began working at a large brokerage firm in the Twin Cities, bright-eyed and armed with a new investment securities brokerage license. Like so many wealth management firms, this company had a commission-based fee structure, meaning it profited whenever a financial product or security was sold to a client. The financial advisor and the firm would take a slice of the profits. 

I didn’t think about it much at the time, but this type of compensation structure can inevitably lead to conflicts of interest. Ultimately, the brokerage firm centers around profit, which can lead to pushing products or timelines that are not in the client’s best interest. The firm does not have a fiduciary duty to serve the client first and the company second. The company, and its profits, take priority.

Regardless, when I began my work in the personal finance arena, I had no real reason to examine my company’s fee structure. I was simply happy to be part of the team, and I reasoned that I would give unbiased, solid advice, regardless of earning incentives. I was wrong.

Advice or Sales?

You should be glad you don’t work as a financial planner who believes in a fiduciary standard—who has pledged to work for the best interests of clients rather than yourself or the company you work for. Why?  Because the big sales organizations on Wall Street have been trying to influence the organizations that make our rules.

Case in point is the Securities and Exchange Commission’s new Reg BI—aka Regulation Best Interest. The regulation was in part intended to help consumers recognize the difference between fiduciary advisors and salespeople who sell insurance, annuities, and other products. 

Alas, I believe that Reg BI actually did little to stop salespeople from calling themselves professional advisors, and even recharacterized their asset gathering and sales activities, on behalf of their brokerage employers, as “best interest.” The result is that consumers have to be extra careful that they aren’t being sold products under the guise of advice.

What Is Fiduciary Investment Advice and Why Does it Matter?

How do you know when an investment recommendation is worth heeding? Red tape and legal jargon aside, it’s about finding an advisor who exemplifies a few simple ideals:

“There’s no confusion in the minds of investors as to what they want. They’re very clear. They want somebody they trust who makes recommendations that put their interest first and don’t allow the advisor to profit financially at their expense.”

— Phyllis Borzi, Dept. of Labor EBSA head, 2009–2017

That makes sense, doesn’t it? There’s even a term the investment world has been using since at least the 1940s to describe this high standard. It’s called fiduciary advice.

Why Fiduciary Advice (Still) Matters

Fiduciary advice makes sense to us too. Investors deserve nothing less than the fairest possible shake from anyone entrusted with advising them about their personal wealth. For decades, the fiduciary standard has shaped this high level of care for those of us committed to delivering it.

Having a fiduciary duty to our clients puts us on similar footing with other professional consultants, such as physicians or attorneys. You hire us partly because we have dedicated our career to understanding every facet of your wealth. But you also hire us to always use our knowledge to advise you according to your highest financial interests – even ahead of our own.

Unfortunately, the fiduciary standard has been under attack lately. A recent Securities and Exchange Commission (SEC) overhaul has downplayed rather than strengthened its significance by overlaying it with a new industry standard, paradoxically called “Regulation Best Interest.”

Investors are eager to find sources of objective advice. Unfortunately, investment advisors often may have inherent conflicts of interest with the investor. Biased advice is something that investors need to learn how to identify if they want to avoid it. 

The Prudent Practices for Investment Advisors defines a global fiduciary standard of excellence for professionals who provide investment advice, including financial advisors, broker-consultants, investment consultants, wealth managers, financial consultants, trust officers, financial planners, and fiduciary advisers. This fiduciary handbook addresses conflicts of interest in one of their 21 Prudent Practices. As investment advisors have a duty of loyalty to their clients, Prudent Practice 1.4 requires that the investment adviser identify all conflicts of interest and then address these conflicts in a manner consistent with their duty of loyalty to the client. Practice Criteria 1.4.2 further stipulates that conflicts of interest are to be avoided when possible and always when required by law, regulation, and/or governing documents.   

If investment advisors are to avoid conflicts of interest with their clients, we need to identify the various types of conflicts of interest between the investor and the investment advisor. What does a conflict of interest look like and sound like? How is an investor supposed to be able to identify a conflict of interest with their investment advisor? How is an investment advisor to avoid conflicts of interest with the investor when they themselves often cannot identify a conflict of interest with the investor?