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Putting investors’ interests first

Richard Loth

“There should be no conflict of interest – the client’s interests always come first.”Last July, I provided that guidance in an article on “investment advice givers,” i.e., brokerages, financial planners, insurance companies, banks and independent advisers. Among other qualities, I urged readers to insist on any advisory entity’s complete objectivity regarding investment selections.Unfortunately, not all providers of investment services have a clear, unambiguous understanding of what constitutes “complete objectivity.” A recent major scandal, which I’ll detail below, highlights why individual investors need to stay vigilant.Millions of individual investors choose to maintain securities accounts with brokerage firms and follow the advice of their full-service stock brokers. As such, brokerage firms, and their representatives, play a major advisory role with the investing public and need to be held to a high standard of professional ethics. A story that needs tellingLast month, the Wall Street Journal devoted four in-depth articles – on Dec. 21, 23, 28 and 29 – to the problems at Edward D. Jones & Co. involving revenue sharing and problematical trading practices. Needless to say, this is a major story for the investing public. And yet, a thorough archive check of both of Denver’s major newspapers, as well as the “News for Individual Investors” section of the culprit company’s Web site, found no mention whatsoever of the Securities & Exchange Commission’s investigation, findings, and sanctions.Edward D. Jones is one of the largest retail brokerages in the U.S. Locally, it has a branch in Eagle, and nearly 10,000 offices nationwide. The case is particularly important because it only services individual investors – it has no institutional or investment banking business. Therefore, its impact on the retail investing public is significant and widespread. The gravity of this case is further confirmed by the subsequent announcement of the resignation of Edward D. Jones’ top executive, Douglas E. Hill.The Wall Street Journal articles reported that Edward D. Jones’ agreement with the SEC represents “the largest regulatory settlement to date involving revenue sharing at a brokerage house, an industry practice in which mutual fund companies pay brokerage houses to induce them to push their products.”The SEC report details how Edward D. Jones “accepted tens of millions of dollars in secret fees from seven preferred fund groups, potentially tainting the Jones brokers’ investment advice to customers in favor of these hands. Surprisingly, revenue sharing, which I think is a clear conflict of interest, isn’t illegal. But investment intermediaries get in trouble when these arrangements are not disclosed to their customers. SEC sanctionsA $75 million settlement will be available to Edward D. Jones customers “who the regulators contend were harmed because they didn’t know their brokers might be unduly influenced by bonuses and other incentives to sell the preferred funds.” The fund groups are: American, Putnam, Hartford, Federated, Goldman Sachs, Lord Abbett and Van Kampen. Under the SEC order, Edward Jones has to disclose its revenue-sharing practices on its Web site – http://www.edwardjones.com – and the aforementioned fund groups must also send the same information to current and former customers. My purpose here is not to single out brokerages for condemnation of inappropriate revenue-sharing practices. Edward D. Jones just happens to be a very large target at this point in time, and the lack of public awareness of this case is worrisome. One of the first things investors need to know from any investment intermediary is what is the investment or service going to cost. And that means the complete cost – fees, commissions, expenses, etc. Brokerage representatives and other financial advisers need to fully disclose any and all financial incentives, whether direct or indirect, that would influence their decision to recommend one investment over another to their clients. The Investing Wisely column is written by Richard Loth, managing principal of Mentor Investing, an independent registered investment adviser. Loth can be reached at (970) 827-5591 or mentorinvesting@comcast.net. Vail, Colorado


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