About 20 years ago, I came to the conclusion that the primary job of financial advisors is to protect their clients from the financial services industry. That’s not to say that all, or even most, financial services companies are inherently bad: they aren’t. However, when you have control over billions of dollars of other peoples’ money, there are powerful financial incentives to put one’s interest ahead of theirs.

A good example of this came last year in the travails of Wells Fargo & Co. In case you were distracted by the divorce proceedings of Brad and Angelina, it came to light last fall that incentivized by large bonuses and high compensation for good sales numbers—and terminations for underperforming—thousands of Wells Fargo employees had been opening additional credit card accounts for millions of existing clients without their knowledge or consent. 

Now, I’m not saying that Wells’ upper managers were aware of this widespread fraudulent behavior: but I am saying that because their compensation was largely based on increasing profits, and the resulting stock price increases, they didn’t have much of an incentive to look for the reasons behind these sudden increases in “productivity.” 

As part of my admittedly infrequent series on “Financial Services Explained,” primarily for younger advisors and others who are new to the industry, I offer the following observations, prompted by Janet Levaux’s January 13 ThinkAdvisor story “SEC Fines Morgan Stanley $13M for Overcharging Clients.” 

As you may have guessed, this is yet another example of a financial services firm taking advantage of its clients. In this case, it seems that during the 14 years between 2002 and last year, Morgan Stanley’s systems inadvertently overcharged some 149,000 advisory clients a combined total of $16 million. Astute financial advisors will point out that this works out to only $107.38 per client (and $7.67 per year, each), so not exactly the crime of the century. Still, one has to wonder how Morgan Stanley’s financial people at every level failed to notice that revenues on managed accounts increased an additional $1 million year to date for 14 years, for no apparent reason.  

The Morgan Stanley case reminds me that back in 2014, FINRA cited seven brokerage firms (Edward Jones, Stifel Nicolaus, Janney Montgomery Scott, AXA Advisors, Merrill Lynch, and Stephens Inc.) for failing to waive a total of $107 million in sales charges for more than 73,000 charitable institutions and retirement accounts, dating back to 2009.  

I understand that these are very large financial institutions, with millions of clients and trillions of dollars under management. I understand that the technology systems for keeping track of all of it are both massive and extremely complex. Yet if the above cases were simply the result of random system errors, wouldn’t one expect that there’d be an equal number of cases in which brokerage firms undercharged their clients?

Have you ever heard of any such cases? I’ve been covering financial services for 33 years, and I haven’t, either. Maybe it’s just a coincidence. But to my mind, these cases illustrate why investors need financial advisors and why independent advisors are better suited to protect their clients from the financial services industry.