The Big Banks Have Figured a New Way to Stick It to the Consumer

The Big Banks Have Figured a New Way to Stick It to the Consumer

A money grabbing trend has started in the financial services/banking industry and ironically it is a result of a government mandated rule.

The Department of Labor issued the new fiduciary rule to go into effect sometime in the future. The fiduciary rule was passed so that advisors put the interests of their clients first ahead of their own.  This primarily points to the commission based advisor.

For example, let’s say that the advisor has product A and product B.  Product A pays a higher commission.  Product B is better for the client.  However, the advisor recommends product A.  That is a conflict of interest and the advisor putting his or her interests ahead of the client.

Most of the major brokerage houses are owned by the big banks.  For example, Bank of America owns Merrill Lynch.  So, what are the big brokerage houses doing?  They are taking commission based accounts and converting them to fee based accounts.  In fee based accounts, the notion is that there is no conflict of interest because we are dealing with fees versus commissions. The same fee gets paid regardless of the advisor’s advice.

This article points out the increase in revenue for the banks because of advisors switching from a commission model to a fee based model.  The article states that Bank of America Merrill Lynch saw an increase of $29.2 billion in fee-based accounts in the first quarter.  JP Morgan saw $8 billion of new deposits.  These deposits will create new fees for the banks.

There is one problem with this change from commissions to fees and it is ironically enough it is a conflict of interest.

What is the advantage for someone who was in a buy and hold commission account changing to a buy and hold fee account?  There is in most cases no advantage for the client.  A fee based model implies that the advisor is going to actively manage the account.  Are commission based advisors suddenly going to become seasoned money managers?  I think not.

They solved the old conflict of interest by creating another conflict of interest.  Regulators frowned on commissions so to stay in the business the big banks encouraged their advisors to switch to fees.  However, they aren’t going to do anything to earn those fees.  Who gets the advantage here?  The advisor gets the advantage and so does the crooked banks/brokerage houses that are encouraging it.  Once again, the big banks who own these brokerage firms are sticking it to the consumer.

If your advisor wants to switch you to fees, dig a little deeper to see the advantage.  For a fee advisor, there should be an active management strategy in place.  So, look past the glossy marketing brochures because you are probably seeing a commission account dressed in fee clothing.   Most commission based advisors are going to buy and hold and maybe reallocate at the end of the year.  That is not worth a big management fee.  It shouldn’t take long for investors to realize that they are being taken advantage of.  In fact, wait until the next big downturn.

Who gets the advantage?  In most of these offers to switch to fees, there won’t be one for you.  However, there will be a new revenue model for the advisor.

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