Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.
How much do you trust “Wall Street” when it’s defined as the big brokerage houses such as Goldman Sachs and Merrill Lynch? If your answer is “not much,” you have a lot of company. A whopping 41 percent of Americans have “little or no faith” in the fairness of large investment firms. Only credit card companies, corporate CEOs, the federal government and lawyers fared worse in a recent Yankelovich Monitor survey.
That lack of faith is justified if we can believe a recent New York Times column by former Goldman Sachs Executive Director Greg Smith, in which he charges that his old firm has lost its moral compass. According to Smith, the once principled and far-sighted Goldman is now concerned only with maximizing its own bottom line and “has zero concern for making money for the clients.”
How can a company whose product is “We’ll make money for you,” get away with generating huge profits while making, well, not much money for you? Who knows? But you should understand these mega-firms do not have a fiduciary responsibility to you, which means they are under no legal obligation to put your interests ahead of theirs.
Many investment advisory firms do operate as fiduciaries. When deciding on which investment vehicles to buy for you, these advisers cannot be swayed by the commissions they would receive from the transaction. So when choosing between two similar investments, the fiduciary would (in practice) recommend the investment he deems best for the client.
When a non-fiduciary firm needs to make the same decision for a client, it is free to sell him the investment that pays the highest commission, so long as it meets certain risk parameters. Those higher expenses (or commissions) might very well make this the better choice for the brokerage firm, and not the client.
Let’s be clear. No investment firm is legally required to turn a profit for you. But a fiduciary firm is required to put the client’s interests ahead of generating commission and revenue. Let’s also remember that fiduciary firms aren’t non-profits — they need a source of revenue to survive. Many fiduciary advisers, including mine, generate income by charging clients a fixed percentage fee for the money they manage. This allows fee-only firms to get paid without the conflicts inherent in relying on commissions, and aligns the client’s goal (growing their money) with the firm’s goal –- more money to manage.
As you look for help with your investments, understand exactly how your adviser will be compensated. There is a big difference between being treated like a client and being treated as a commissions cow.
How do you feel about commissions versus fixed fees?
– By Wes Moss, for Atlanta Bargain Hunter