Building Wealth During Covid-19: Day 3 - Should You Be Using a Brokerage?

March 19, 2020
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Today I was planning to post about setting (and achieving) financial goals but I've decided to save that for another day. As the market route continues, I want to talk about a timely topic most investors overlook but we at Spurstone have always taken very seriously: Not just how your wealth is invested but also WHERE your wealth is invested.

I've started to hear comments in the news and on social media about the financial security of banks and brokerage firms. While this current market dislocation is different than the financial collapse of '08, it's bringing back this topic that many investors had quickly forgotten. How safe are the institutions that custody your wealth?

This is NOT meant to scare...

This post is NOT meant to scare anyone or to say we believe that banks and brokers are not solvent. This article IS meant to get you thinking about more than just the risks of how you invest your wealth but also where you invest it.

Here's a statement that shocks a lot of people...

Here's a statement that shocks a lot of people: Banks and brokerages can co-mingle investor funds. Let that settle in your brain for a minute. Now, also know they can take client securities and lend them to other institutions (for their own profit of course, not yours) and even use them to secure their own lending. Yes, they can use client assets as collateral for their own lending. I don't know about you, but with my past experience in this business those facts don't make me feel all warm and fuzzy.

Once you realize that banks and brokerage firms exist to maximize their profits at client expense, while also actively lobbying to ensure they do not have to act in a client's best interest, the picture can begin to come into focus. The layers of profit maximizing and conflicts of interest can be astounding, retail clients are just another cog in that wheel.

So, what can you do about it? Here are three questions I recommend you ask of your current or potential financial advisors:

1) When you give clients financial advice or manage portfolios, could you act as a broker?

We recommend working with an advisory team that is a fiduciary only, not also a broker. Fiduciaries have a legal obligation to act in your best interest, brokers do not. A big tip off is that brokers typically earn commissions.

2) How are you paid? Who are you paid by? Is your pay generated by anything other than the fee you charge for advice? Are you ever paid any commissions, trails, bonuses or other "sales" incentives?

This is not an inappropriate question, it's one that should be asked and easily answered. These questions are to determine potential conflicts of interest your financial professional may have that could impact the advice you receive. It is common for bank employees to steer clients into investments or products due to incentives you might not even know exist. There have been many cases, but here's a high profile one you likely heard of.

3) Is the custodian (the company holding your investments) a bank or broker?

If the answer is yes, that custodian does not have an obligation to act in your best interest and could even be using your assets in ways the broker has no influence on (see my co-mingling and lending comments above). Here's a real example of how that has occurred in the past at a major brokerage firm. Don't worry, the firm did not have to pay damages to the client but was scolded for putting it's own interest ahead of the client's. 🙄

We recommend to our clients that their advisors and custodians BOTH be fiduciaries. This means we do not utilize the services of banks and brokerages for managing client assets. We have other solutions that we feel are better for the client for both safety and transparency.

Again, I am not saying there is currently a liquidity risk in the banking industry. Even without that risk, I believe having clear transparency for how your partners operate is a prudent issue and right now is a perfect time to evaluate your options.

If you'd like to learn more...

If you'd like to learn more about how we manage client portfolios without banks and brokers, please feel free to call our office (860) 264-1111 or send us a note  We are happy to share.

More to come tomorrow so enjoy today!

-Tim Golas, Partner @ Spurstone - Architects of Executive Wealth