What do you think about when you walk into a place that puts the “Employee of the Month” picture on the wall? We've all seen them at auto dealerships, retail stores, and even some restaurants. I don’t know about most folks, but for me, that is generally the last person I want to speak to at a business.
“Why? Wouldn’t you want to work with the best employee,” you may ask?
Absolutely, but the “best” employee for the employer isn’t necessarily the best for the customer. That is why it may serve you well to avoid those with the glamour shots hanging on the wall.
I have a confession to make. I didn’t come to this realization by being suckered into an expensive undercoating on a car that never sees road salt in temperate Texas winters. Nor have I been swayed by one too many pretty waitresses stooping down to eye level to see if I need another margarita. (Actually, that one may not be entirely true.)
No, I came to this point of view after years of striving to be the employee of the month/quarter/year, or later as a manager, being the person who choose said employee. The honorees always had one thing in common, besides the photos, plaques, and trophies.
They sold the most stuff.
The titles varied over time. “Investment Representative”, “Financial Planning Consultant”, and “Account Executive” were just a few of the business card descriptions used at my old company. What they all had in common were that they were primarily measured, ranked, and promoted because of their success in “development”, aka, sales.
Wonder if regulators understand how it works? See FINRA’s descriptions on their website:
“A broker-dealer is a person or company that is in the business of buying and selling securities—stocks, bonds, mutual funds, and certain other investment products—on behalf of its customers (as broker), for its own account (as dealer), or both. Individuals who work for broker-dealers—the sales personnel whom most people call brokers—are technically known as registered representatives. [emphasis added]
Registered representatives are primarily securities salespeople [emphasis added] and may also go by such generic titles as financial consultant, financial advisor, or investment consultant. The products they can sell you depend on the licenses they hold. For example, a representative who has passed the Series 6 exam can sell only mutual funds, variable annuities, and similar products, while the holder of a Series 7 license can sell a broader array of securities. When a registered representative suggests that you buy or sell a particular security, he or she must have reason to believe that the recommendation is suitable for you based on a host of factors, including your income, portfolio, and overall financial situation, your tolerance for risk, and your stated investment objectives.”[i]
Notice that nowhere in the description does it suggest that it is the RR’s job to put the customer’s interest first. Their job is to sell.
As a young employee, I was taught that success was meeting sales goals. The more goals I hit, the more recognition and money I received. When I was new to the sales role, the top performing RR in my office once advised me that if you weren’t generating an occasional customer complaint, you weren’t selling hard enough.
As a manager, I had a long-time top performing salesperson (who had had several brushes with customer complaints) say to me that as long as he exceeded his annuity goals that no one at the company had ever given him grief. He still works there today, in spite of my best efforts.
Over time, as you are recognized for meeting and exceeding sales goals, you accumulate mementos of the “achievements”. Little trophies, certificates, and photos commemorating the award trips and honors clutter the desks and walls of the top achieving RRs at every brokerage firm.
It can be addicting. Once you’ve tasted the nectar, you want more of it. To get more, you MAY work harder. At least that’s what senior management likes to tell themselves and Compliance departments hope to insure. But the reality is that corners get cut, half-truths are told to expedite sales, and the illusion of “expert” advice is presented in the most scalable (cookie cutter) way.
The realization that profits were prioritized over client portfolios didn’t happen overnight for me. It started with annual mandatory meetings to discuss why client accounts that we managed didn’t perform as well as they seemingly should have. Even as academic evidence[ii] began to mount that explained that the fees were the main drag on returns, no one ever suggested that the 1.75% combination of advisory fees + underlying mutual fund costs virtually guaranteed under-performance.
The bullet points provided by the company were designed as much to reassure the RRs to keep selling the high fee accounts as much as they were to provide talking points for wary clients. To underscore these conversations, managers were regularly treated to “Finance Updates” that clearly showed how important these highest fee “solutions” were to the bottom line.
The message was simple, if you wanted to get ahead, the path to success was to sell the most profitable (to the firm) products.
To be clear, I think the vast majority of brokers want to do the right thing for their clients. Like I said, many of my old company’s training efforts were designed as much to convince RRs that they were selling the best product as much as they were to handle customer objections. In fact, they were all just working within a system that is built to take advantage of the average investor that just doesn’t know any better.
How can you protect yourself from a system that some may describe as rigged? Start by looking at the pictures on the wall.
Another approach, of course, would be to seek out an independent advisor that puts your interests ahead of their own. One that is completely transparent about fees, portfolio construction, and performance. If that appeals to you, get in touch.
[i] http://www.finra.org/investors/brokers
[ii]EUGENE F. FAMA and KENNETH R. FRENCH, Luck versus Skill in the Cross-Section of Mutual Fund Returns, THE JOURNAL OF FINANCE • VOL. LXV, NO. 5 • OCTOBER 2010