One of my summertime readings was John Stossel’s book, “No They Can’t: Why Government Fails—But Individuals Succeed.” Stossel, a journalist, Fox cable network host and avid libertarian, delves into a multitude of examples of how we intuitively run to government to solve problems.
In Stossel’s book, he argues that we should abandon our beliefs that a government can cure all national ills and instead “retrain our brains to look at only the facts, to rethink our lives as independent individuals—and fast.”
As I read through Stossel’s take on some of our social issues and why our intuitions about them are wrong, it was apparent to me that there are many similarities in the financial services industry. Here are a few examples of intuition gone wrong as applied to the independent broker-dealer channel:
Intuition tempts me to believe that having extensive paperwork will protect reps and their broker-dealer. Reality taught me the only thing they’ll be protected from is the ability to successfully recruit new advisors.
Efficient paperwork is becoming increasingly important to representatives. One rep we talked to, who holds a Ph.D. in financial planning, told us that his primary motivation in making a move to a new broker-dealer was to minimize paperwork.
He explained, “I sit down with a client, placing a large pile of forms in front of them. We go through each of the forms, but they don’t read any of it; they sign where their signature is required. They sign the forms because they trust I have their best interest in mind. They don’t want to read the forms because they’re long and written in legalese. Ideally, I want my clients to be able to read and understand what they are signing rather than simply trusting me.”
Excessive paperwork can make clients suspicious that someone is trying to either screw them over or confuse them, which makes the representative’s job of building trust more difficult. The broker-dealers that “get it” keep most client account forms in the two- to four-page range.
Intuition tempts me to believe large broker-dealers are better able to supervise their reps because they have more compliance resources. Reality taught me reps are more likely to slip through the cracks at larger firms.
Smaller firms have the ability to know their reps much more intimately than larger firms do. We’ve heard numerous stories of smaller broker-dealers uncovering Ponzi schemes, flakey OBAs and similar fraudulent arrangements before they became big problems. We have yet to hear a similar story from a large firm—or from FINRA for that matter. This intimate relationship enables small and mid-sized broker-dealers to more readily uncover problems before they become news headlines.
Intuition tempts me to believe reps will make the most at a firm that offers the highest payout. Reality has taught me they’ll make the most at a firm where they “net” the most.
You’d think this was common sense. However, reps are often blinded by payout rather than seeing the big picture. A lower administration fee on rep-directed advisory platforms is just one area where reps can net considerably more. Other savings can come from general costs such as E&O insurance, technology fees, whether the firm passes through SIPC/FINRA assessment fees, and audit fees.
The mind-set is so strong for reps to choose a 90% payout that when we come across broker-dealers that cap payout at 85%, we actually encourage them to raise expenses so they can afford to offer 90%, even though the rep would net more at the 85% payout with the broker-dealer’s current cost structure. When recruiting, overcoming the lesser payout can be extremely difficult—intuition overrules the fact of netting more with the slightly lower payout.