Consumers of Financial Products Should Continue to be Wary

By Fei-Lu Qian

Thought you were saving money by using a discount broker?  Well, maybe not.  It seems Wells Fargo is not the only financial firm that pushes its clients into other financial products and services.  According to an article published in the Wall Street Journal, some of the largest discount brokerage firms such as Fidelity, Schwab and TD Ameritrade have been pushing their “clients toward more-expensive products” through their armies of representatives called financial consultants.  Based on interviews of former employees from the three discount brokerage firms, the compensation practices in those firms “encouraged people to sell products that were more lucrative both for the firm and for the employee – and cost customers more.” 

For example, at Fidelity, representatives are paid 0.04% of the assets clients invest in products such as mutual funds and exchanged-traded funds, but they “earn more than twice as much, 0.10%, on choices that typically generate higher annual fees for Fidelity, such as managed accounts, annuities and referrals to independent financial advisers.”  Indeed, according to a former Fidelity employee who worked there for five years said “you had to lead off” with a Fidelity managed account if a customer had at least $50,000, “and if you didn’t you had to have a reason for it.”  Simply, “sales incentives not only enhance pay directly but also help representatives win ‘Achiever’ bonuses that can be” as much as $82,500 a year at Fidelity.  Similarly, at Schwab, “employees can win an award including a trip to such destinations as Florida or Hawaii.” 

The discount brokerages do not require their financial consultants to disclose about their potential incentives with clients.  Another former Fidelity employee cited by the WSJ believes that the fact that he earned more through compensation and bonuses from selling in-house managed accounts and advisory services, in his mind, “created a conflict.”  The conflict arises as a financial consultant is supposed to act as a fiduciary and act in their client’s best interests, but at the same time, the financial consultant is highly incentivized to push a client into managed account products that may not be in the client’s best interest.  The former Fidelity employee explained to WSJ, “If a target-date fund was suitable for a client’s situation for a client’s situation and a Fidelity managed account was also suitable, the fact that a managed account paid more created a conflict of interest and made it impossible to act in a true fiduciary capacity.”  

In short, when it comes to your money it continues to be “buyer beware.”