The latest thinking from Greenspring Advisors.

Blog Categories:

Institutional Investment Consulting

Wealth Management

Blog Tags:

Brokerage Industry

Conflicts of Interest

Related Resources:

Due Diligence? Really?

How To Maximize Your Business Value

Unreasonable?

How Poker Can Make Us Better Decision Makers

The Dirty Little Secret About Warren Buffet’s Bet With A Hedge Fund Manager

Just Another Reason To Avoid Big Wall Street Firms

J. Patrick Collins Jr., CFP®, EA

The more things change, the more they stay the same.  For all the advertising and PR big financial firms are doing to try to show how they are “on your side”, not much has changed over the years.  The Wall Street Journal has reported that Merrill Lynch is moving client’s money market accounts to Bank of America deposits.  Why does that matter?  Here is the explanation from the WSJ:

The giant firm thus joins many other major brokerages, including Morgan Stanley and Charles Schwab Corp. , in potentially capturing more of the income on cash balances for themselves, rather than passing most of it through to clients.

Such a move has steadily become more lucrative as the Federal Reserve raises interest rates.

In the second quarter, with rates nearly 1 percentage point higher than they were a year earlier, brokerage firms indicated that as much as 25% of their gross profit came from what they earned off their customers’ cash.

In exchange for depositing their customers’ uninvested cash at banks—often, as in Merrill’s case, banks affiliated with the firm—brokerages receive hefty fees.

It is no coincidence that this is happening when clients are finally starting to earn some yields on their money market accounts.  The article states that the average money market rate is now up to 1.77% while this change will drop yields to 0.25% for Merrill Lynch customers.  This is a small but glaring example of the conflicts that run rampant at major Wall Street brokerage firms.  When you can make money off of the products your clients buy, you have a massive conflict.  The solution is simple and obvious- don’t allow firms that give advice to make money off of the products they sell.  Have clients pay their advisor for advice only- period.  This is how Greenspring Advisors is set up along with other firms who have made a commitment to act in their clients best interests.  When you remove the incentive to earn commissions on product sales, or make extra yield on money market accounts, the advisor understands who their loyalty lies with…the client.