by Lauren Aimes
Brand-Name Firms Can Mislead Investors
The major brokerage firms have well-known brand names that most investors have heard at one time or another, whether on a radio or TV ad, online, etc. These firms employ many thousands of advisors who often use their firm’s brand name as a means of drumming up business. But does the fact than an advisor works for one of the major wirehouse brokerage firms really mean that he or she is qualified to handle your investments? Given the difficulties that the major firms have experienced in recent years, both in terms of run-ins with regulatory bodies and investor complaints, the answer to this question is often times no.
So then, who are the best financial advisors?
A Brand Name Can Hide a Multitude of Sins
While many investors may believe that no research is needed when working with an advisor at a brand-name brokerage firm, taking this approach can be a mistake. Not only have these firms themselves been cited by various regulatory agencies for malfeasance when dealing with investors, but a number of their advisors have also been involved in questionable activities, which show up on their records in the form of customer complaints.
There are numerous examples of major brokerage firms being cited for malfeasance. For instance, industry regulator FINRA fined Wells Fargo Securities, LLC, and Wells Fargo Prime Services, LLC $4 million jointly for recordkeeping violations. Giant brokerage Merrill Lynch was fined $10 million by the SEC for misleading customers who invested in structured notes. J.P. Morgan Securities and J.P. Morgan Clearing Corp were fined a total of $1 million by FINRA for misconduct involving operational, supervisory and record-keeping violations.
At the advisor level, in addition to potential ethics infractions or securities law violations, advisors at major brokerage firms may lack the requisite certifications or qualifications to properly advise clients. However, due to the “halo effect” of working for a brand-name firm, in some cases, investors fail to properly research either the past record or financial certifications of advisors associated with such a firm.
If you assume that because an advisor works for a major financial firm, he or she is automatically qualified to be your advisor, you may end up working with an advisor who lacks the training or knowledge to effectively assist you in achieving your investment goals.
Building a Brand is Expensive
While some investors may believe that firms become brand names because of investment excellence, in actuality, a brand name is an expensive proposition.
Brand-name brokerage firms must advertise in print, on TV and, in the Internet age, on Google Adwords, to make sure their name is familiar to potential investors. Experts estimate it can cost $200 million and take years to establish a brand in America. Independent advisors don’t have budgets of this scope, and as a result, can be almost invisible to the average investor, even if they are highly qualified with an excellent track record of helping clients meet their investment objectives.
Big firms have the advertising budget and scale to make sure people recognize their brand. Merrill Lynch, for example, has 15,000 brokers. However, the fact that big brand-name firms have the budget to make their brands known to investors doesn’t mean that their performance will necessarily be superior to independent brokers. Actually, just the opposite may be true in some cases, as independent brokers who can’t rely on massive advertising budgets to bring in new clients often rely on word of mouth instead. To attract new clients this way, they must provide their existing clients with excellent performance and service to generate referrals.
The Importance of Researching Advisors
Given the tremendous budgets big investment firms can put into advertising, it’s no surprise that many investors feel comfortable doing business with these firms. However, given that there are both good and bad advisors working for wirehouse brokerage firms, their ability to create a positive image via marketing represents a hidden risk.
Investors who simply assume that any advisors employed by such firms are of high quality, run the risk of placing their investments in the hands of an advisor who isn’t able to offer them the support they need to reach their financial goals.
To avoid the risk of working with a bad advisor at a big brokerage firm, investors should make sure to research all advisors they are considering doing business with, whether they work at a large brokerage company with a brand name or at a small independent advisory firm.
FINRA’s brokercheck offers information on all licensed advisors, both at large and small firms. Paladin Registry also provides many tools that allow investors to research a financial advisor, including a match system, which provides information for vetted financial advisors through a five-star rating process, a Check a Credential function and a financial advisor search function.
When researching an advisor, it is important to look into more than simply whether there are any red flags on the advisor’s record. Another issue to consider is what type of performance the advisor has been able to achieve for his or her clients. Here again, don’t let the fact that a firm has a brand name distract you from finding out how an advisor’s clients have done. As previously mentioned, independent advisors who can’t rely on a brand name and typically gain new clients from referrals could be said to be more focused on delivering superior performance to their clients as a result.
Make sure to inquire about the investment track record of any prospective advisor you are considering prior to making a decision about whom to employ, whatever the size of the firm they work for.
While brand-name firms have the capital and economy of scale to make their names known, this is irrelevant when it comes to being able to help you successfully attain your investment objectives. Being well-known is not the same as delivering superior performance, so it is important to perform adequate due diligence before retaining any financial advisor.
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