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Conflicts

Conflicts

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 Welcome to our listener-supported podcast, Money Talk, unpromised absolute financial truths behind financial perceptions with hosts Ed Sutkowski and Chuck LeFebvre. Let's listen in.Chuck: Welcome to Money Talk. I'm Chuck.Ed: I'm Ed. Today's topic is conflicts.Chuck: You say conflict and immediately I think about lawyers. I know we're going to talk about lawyers, but of course, also we're talking specifically about conflicts of interest.Ed: We're going to be talking conflicts associated with economic interests, money, honey.Chuck: Yes.Ed: And specifically, the lawyer that manages the estate of an individual and charges a percentage, which is interesting. I mean, a decedent's estate and does the investing. Any observations about that, Chuck?Chuck: Yes. Clearly, there's an absence of independence there. What happens anytime you're involved in investing, I don't care who you are, if you're actually marketing investments for somebody, the financial industry is great at especially one thing and that is providing some means by which revenue from the investment vehicle makes its way back to whoever marketed it. And so, whenever I hear about a lawyer or a CPA or anyone else who holds themselves out as being completely independent making investment decisions, I always wonder: Wait a minute! What types of under the table or in some cases fully disclosed? Yet still, in my opinion, inappropriate financial arrangements are in place whereby they're being paid by the financial instrument itself for the marketing of the financial instrument.Ed: You must understand that a lawyer's role is that of a fiduciary.Chuck: Yes, and for this reason, I really feel most strongly about this in the case of lawyers, maybe it's because we are lawyers. I think of that one as one where the clients really ought to expect absolute independence.Ed: We travel with various levels of sophistication clients and it's appalling to me. We see some folks that are not sophisticated, but for one reason or another, won a lottery or inherited, are so, so naive and they're taken advantage of. We had a situation this morning. Chuck: Right.Ed: I can't believe it. Chuck: Right.Ed: These representatives, registered investment advisor, sold the client an annuity without disclosing the fees and has in the-- how many issues? I saw 300 or 400 issues.Chuck: Oh, yes, in this investment account. When the client died and then we got into administering the estate, there were, I believe, 238 individual positions in this. When I say positions, what I'm referring to are individual stocks, bonds or mutual fund shares, 238 separate positions. For people who don't travel in the investment markets very frequently or browse, you might think, "The S&P 500 has 500 stocks. 238 doesn't seem like that many positions." That is an enormous number of positions to have in one account. To tell you how vast that net ends up being cast, there were stocks in-Ed: Russian banks.Chuck: Russian banks.Ed: I couldn't believe it.Chuck: Bolivian breweries and places you'd never even heard of. And you're just thinking, "There's absolutely no way one advisor can possibly understand each of those investments", especially when you get into so many foreign issues. On top of having to understand what's going on with that business, you have these geopolitical considerations, you have exchange rate considerations. You have all kinds of things that you if you understand what is good or bad about purchasing stock in some small Russian bank somewhere, you can't possibly also be an expert on all of these other things that were going on.Ed: I see that. I think of this registered investment advisor, and we cleaned up a lot of them. The decedent came over from the old country, was gifted, and has a little trouble with the language, and yet-- anyway, there's all kinds of devices these advisors use to make sure that no one understands what the actual fees are.Chuck: By the way, boy, we really quickly got off the topic of lawyers, but let's go. What's going on with this advisor, I'm almost certain, is that this is driven by a commission structure that rewards lots of trades. Let's say there's $100,000 of cash that needs to be invested, if you just buy a single stock or a couple of stocks, that doesn't really generate as much revenue as if you're trading in 100 different things with that money. By the way, these people who are captive employees of some of the big brokerage houses, they might have their commission structure for their individual trades.Then there's also this overlay incentive that has to do with the revenue that the firm generates from their accounts. By that, I mean it's not directly commissions, but fees and so forth, that the firm gets to charge through its clearing operations. Among those fees have to do with extra fees that have to do with purchasing or even holding foreign securities. It just kind of appalled me to look at this account and see all of these issues that are sitting out ...

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