There was a very interesting article written by Jason Zweig in the Wall Street Journal recently that pointed out that many financial advisers are coming under increased pressure to satisfy the custodians of accounts. That could influence your adviser to invest your money in ways that will reduce your returns. If your adviser is under this kind of pressure, it is an obvious conflict of interest that you should be aware of.
Zweig cited as a source Mark Ambruster, chief executive of Armbruster Capital Management, a financial adviser in New York state. His firm manages approximately $900 million in assets, mainly for individual investors.
Investment advisers such as Ambruster are responsible to safeguard the assets of their clients with qualified custodians. The custodians are responsible to process trades, maintain records, generate account statements and take care of tax reporting. Custodians are generally divisions of large financial firms, such as Fidelity.
According to Ambruster, a representative of Fidelity asked him to generate at least $90,000 more in revenue. He also suggested ways for Ambruster to generate this revenue. If Ambruster followed the recommendations of the Fidelity representative, the result would have been that Ambruster’s clients would have lost $90,000 in income. Mr. Ambruster indicated that he did not follow the recommendation of Fidelity’s representative.
Zweig asked Fidelity for a response. Fidelity’s response, from a custodian executive, was that “Fidelity does not require wealth-management firm clients to take any one specific course of action, and several options are provided to all (such custodial) clients.”
Michael Kitces, a well-respected financial planner and journalist, indicated that these conversations about extracting more revenue are happening with “increasing regularity and frequency” between many custodians and their financial-adviser clients.
I don’t know whether this is a standard practice, but it was a surprise to Zweig, who is a very knowledgeable financial analyst. If it is common practice, the regulatory agencies, such as the Federal Trade Commission’s Bureau of Consumer Protection should be investigating this practice.
What does this mean for individual investors who expect that their financial advisers do not have a conflict of interest when it comes to investing their assets? Your adviser should not be investing your assets in a way that minimizes your returns in order to satisfy the objectives of custodians who are more interested in maximizing their income than ensuring that your adviser continues to satisfy his clients’ objectives.
What can you do to protect yourself? You have the right to expect that your adviser is more interested in maximizing your income, not the income of the custodian he employs.
You should ask your adviser if his custodian has asked him to invest your assets in a way that maximizes income for the custodian rather than you. If your adviser indicates he has done this, you should ask to be reimbursed for the lost income, and you should consider obtaining a different adviser. Without reimbursement, you should consider legal action. You should definitely consider using a different adviser if your adviser admits that he has invested your assets in a way to satisfy his custodian rather than you.
Bottom line: Do not hesitate to find out if your financial adviser is satisfying the needs of his custodian rather than you. If that is the case, either you need a new adviser or your adviser needs a new custodian. Regulatory agencies should investigate this situation. Advisers should not be faced with such a conflict of interest. Their responsibility is to satisfy you, not the custodian.
Elliot Raphaelson welcomes your questions and comments at raphelliot@gmail.com.
