Your mutual fund broker is there to help you save for retirement or your daughter's education by helping you select investments that match your tolerance for risk and your time frame for saving.
Your mutual fund broker is also there to save for his own retirement and his daughter's education by selling you investments that pay him and his firm commissions and other fees.
The Securities and Exchange Commission, chaired by William H. Donaldson, has moved toward fund accountability.
(Dennis Brack -- Bloomberg News)
Investors who don't keep both facts in mind may find themselves getting a lot less than they should from their financial choices, according to regulators, academics and consumer advocates.
Over the past two years, the brokerage industry's main regulators, the Securities and Exchange Commission and NASD, have uncovered and punished unsavory practices, including failing to give investors their promised commission discounts and accepting secret payments to push particular mutual funds. The exact details varied, but all of the cases had a common thread -- brokers who engineered transactions to earn themselves a benefit rather than primarily thinking of their customers.
"You should always be suspicious of your broker, just like you should be suspicious of your lawyer or other professionals you deal with. Is their advice 100 percent in my benefit?" said Walt Woerheide, vice president of the American College in Pennsylvania, which specializes in training financial industry professionals.
More than 91 million Americans -- and almost half the nation's households -- own mutual funds, and the vast majority of them don't buy their shares directly from the fund company. Many invest through a retirement plan that limits their choices and negotiates discounted fees and commissions. But almost one-third of fund customers rely on advice from someone who works for a broker-dealer, according to the Investment Company Institute, a mutual fund trade group.
Many of the fund buyers who turn to brokers are new to the financial markets and less sophisticated about money matters. They really do need help sorting through the nation's 8,100 mutual funds.
"Like any other important decision, investors can benefit from advice. . . . You can do it yourself, but you probably won't do as good a job," said Bruce Fenton, president of Atlantic Financial Inc., a Massachusetts brokerage firm. He likened a good broker to a good doctor. "You can go online, choose a drug you want and get a service that can give you Canadian drugs, but you aren't getting the best health care."
But regulators and consumer advocates say that the customers who use brokers often don't really understand their relationship. Although many brokers call themselves investment counselors or financial advisers, and some sit in the lobby of a bank or even a retirement center, they are fundamentally salesmen who make their money from commissions, just like car salesmen.
"Despite their ads, brokers are not advisers, they are salespeople. . . . They have no legal obligation to recommend products that are in your best interest. Their obligation is to recommend products that are financially suitable, and that's a much lower standard," said Barbara Roper, director of investor protection for the Consumer Federation of America. "The broker is going to get paid, and that payment is going to come out of your pocket."