Don’t Be Conflicted About Your Broker’s Conflicts of Interest

Wall Street is a breeding ground for conflicts of interest. That’s a given. But what most investors do not realize is that their advisors often have conflicts of interest in the recommendations they make to clients.

Here’s a direct quote from a client proposal from Smith Barney. Note that the references to “CGM” are for Citigroup Global Markets, Smith Barney’s parent company: “CGM and its affiliates may give advice and take action in the performance of their duties to clients which differs from advice given, or the timing and nature of advice given, with respects to other clients’ plans. Moreover, CGM or any of its affiliates may advise or take action with respect to itself or themselves differently than with respect to clients.”

Take a moment to read that quote again. The message is scary-funny. In essence, your Smith Barney broker can recommend that you buy a stock while recommending that another client sell the same stock. Or he/she might urge a more important (i.e., wealthier) client to buy a stock on Monday, and then urge his/her less important clients to buy the same stock on Tuesday, helping to push up the price and making the important client marvel at his broker’s expertise. And worst of all, the last sentence makes it clear that the broker may sell a stock in his personal portfolio even while he’s recommending it to you.

The current system of advice-giving is broken, and the “suitability” standard that broker-dealer reps is absolutely unsuitable for a relationship that’s supposed to be based on integrity and trust. So don’t be conflicted -- take your business to an advisor who adheres to a fiduciary standard and always places the client’s interests above his or her own.

For more investing insights, please take a look at my new book, Your Nest Egg Game Plan or visit my website at www.HardWorkingMoney.com.