Shocker: Many Brokers Give Bad Advice

Here's a shocker from SmartMoney magazine: many brokers offer financial advice they shouldn't give. Here's a summary of the piece:

If you walk into a brokerage and ask for financial advice, chances are the staff will offer to help with anything that's on your mind. But that doesn't mean that they're qualified to help — or that they're particularly good at it. As we recently discovered, much of the advice brokers are giving to would-be clients is off the mark. And according to some critics, some of their offers even violate SEC rules.

To find out how good brokers were at giving advice, SmartMoney sent a staff member to eight brokerages, asked them questions, recorded the answers, and then compared them to what the correct answer should have been. As you may have guessed, the results were a mixed bag -- but with a lot more bad advice that you'd expect from these name-brand brokers.

They asked three main questions: one about college savings, one on life insurance and a third on financial planning. My informal tabulation shows that Wachovia, Dreyfus, Morgan Stanley and Northwestern Mutual were the winners (two of the three correct) while Merrill Lynch and Smith Barney got all three wrong. Of course, I'm sure the results were highly dependent on the person from each of these brokerages who's answering the questions. If each had had a different person, the results could have been completely reversed.

Still, this is yet another warning to us that people who may appear to be experts in the area of financial planning may not be. They may actually be more likely to try and make your money their money (by selling you fee-based plans or investments) or simply not have the skill and knowledge to know the best answer for you. That's why it's important that you educate yourself regarding personal finances. That way you'll at least have a fighting chance to know if someone is giving you decent advice or not.

If you want to see a laundry list of bad things financial planners try to get away with, see my post titled Thoughts on Financial Advisors. Scroll down to the bottom and look at all the posts on the bad financial planners out there today. It's scary.

Comments

[Duane Gran]

I'll call out what I believe a vital part of the article:

"[O]ne important difference separates brokers from many of their competitors: Registered investment advisors and some financial planners are required to be fiduciaries — that is, to act in their clients' best financial interest. But brokers have no such duty. Because of that distinction, some consumer advocates argue that brokers shouldn't be allowed to offer broader financial-planning services."

In a word, I agree. Your car sales person will give you car purchasing advice as well, but anytime someone advises AND sells it tensions the pull between serving the client and the firm. Sometimes these interests align but don't count on it. The board governing the Certified Financial Planner designation has gone back and forth about raising its standard to the fiduciary level, but it will probably only happen when enough people walk into offices prepared to ask, "Are you a fiduciary to your clients?"