Beware Investment Advice from a Broker-Dealer: Part 1 - Spicer Capital

Beware Investment Advice from a Broker-Dealer: Part 1

Investment advice from commission-based financial reps can be influenced by factors other than your best interest...

2 Observations that Should Lead You to Seek Advice Elsewhere

After months working as a commission-based financial representative, I was excited to receive my first retirement statement in the mail. I opened it to find a few cents invested in a Vanguard fund. What caught my attention (more than the pitiful starter sum) was the fund selected by my employer: Vanguard.

I had not been given the option to chose my allocation; my company chose for me. The reason their selection stood out is that Vanguard was not a fund company I was allowed to recommend to my clients.

My employer deemed it the best option for my retirement, yet it was not in my advisory arsenal!


The reasons for this became apparent as my understanding of the industry grew.

But first…

It’s important to understand that, in this series, I write about a particular type of commission-based financial representative: those employed by broker-dealers. You can find a list of the largest broker-dealers by reps here and by revenue here.

If you have acted on, or are considering acting on, investment advice from one of these many broker-dealers, this post could save you a lot of money.

The registered representatives of most of these firms are technically “stockbrokers.” Investopedia, contributing to Forbes, explains:

Stockbrokers, also called registered representatives, are regulated professionals who make trades on behalf of retail and institutional clients in exchange for a fee and/or commission... You will pay a stockbroker a commission on each transaction made on your behalf. Stockbrokers are required to make 'suitable' investment suggestions... Despite this requirement, stockbrokers do not have any fiduciary duty to act in your best interest.

Lest there be any confusion, consider this important note from FINRA:

Also be aware that Financial Analyst, Financial Adviser (Advisor), Financial Consultant, Financial Planner, Investment Consultant or Wealth Manager are generic terms or job titles, and may be used by investment professionals who may not hold any specific designation.

Many commission-based stockbrokers call themselves “financial advisors” or “financial planners” because it sounds better, making it easier to sell their products.

In fact, Last Week Tonight’s John Oliver kindly offers an “official” financial advisor certificate for anyone interested:

John Oliver's Financial Advising Certificate

Now that you know specifically about which reps I am writing, let’s get back to understanding my former firm’s actions - giving me Vanguard while denying it to my clients. It all ties into the two observations that should lead you to seek investment advice elsewhere.

Observation 1: Passive investments are important in portfolio construction

Shortly after I left my former firm, one of my best friends asked me for advice on his 401k allocation. I suppressed the scripted response I was taught - that I was not supposed to opine on corporate retirement plans not administered by my firm.

I could opine freely!

After listing his options, the best solution for him was evident. He simply needed to invest those retirement assets into broad-based, low-fee, exchange-traded funds - ETFs. (I will dive into the good and the bad of ETFs, index funds, and Modern Portfolio Theory in several future posts.) I recommended an allocation across the few ETFs he had available to him.

Surprised by my straightforward and quick recommendation, he asked, “Is that all? Is it that easy?”


For him, his 401k assets, and his goals, that is what made sense. It was that easy!

In fact, that makes sense for most people. When possible, an investor should satisfy much of the investment allocation they are seeking with index funds or ETFs. That is the best starting point and your safest - not to mention least expensive - option.

Investors should satisfy much of the investment allocation they are seeking with passive funds

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Even Warren Buffett agrees

Legendary investor and stock picker Warren Buffett has suggested that most people would benefit from these passive investment strategies. In a 1996 shareholder letter, he said:

Most institutional and individual investors will find the best way to own common stock is through and index fund that charges minimal fees. Those following this path are sure to beat the net results [after fees and expenses] delivered by the great majority of investment professionals.

As further proof of his conviction, he indicated that after his passing, he would prefer his assets be invested in index funds (not in his legacy company, Berkshire Hathaway). From a 2014 shareholder letter:

My advice to the trustee couldn't be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.)

Observation 2: Broker compensation restricts the use of passive investments

Judging from their retirement selections for their employees, it would appear my former firm understands and agrees with this logic: the best investment options for most people are broad-based, low-fee, passive funds.

Yet most of their offerings to their clients are narrow-focused, high-fee, active funds. Does it make sense for them to provide superior options for their employees while denying their clients?

In practice, that sounds unethical. From a business perspective, however, it makes total sense.

Consider the fees

One of the reasons low-cost options are a possibility is because the providers (Vanguard and the like) don’t pay salespeople. There is no commission; the brokerage firm does not get a cut.

Since it wasn’t able to profitably offer these low-cost options to its clients, instead, my former firm partnered with seven mutual fund companies pitched to us as sharing our company vision and values. That’s what we offered our clients.

These mutual fund providers could afford to pay my former firm and its sales reps by charging clients front-load fees (paid in advance for the “privilege” of investing in their fund) up to 5.75%. That means your investment loses almost 6% from Day 1. Considering the power of compound interest, that big hit to your returns at the onset is a permanent drag on your account value.

Also, these fund providers’ on-going expenses are, on average, more than double those of ETFs - more than 1% per annum, versus less than 0.5%.

In a previous post, I shared a simple infographic illustrating the long-term impact of subtle differences in annual fees. It demonstrated that, all else being equal, expense discrepancies can cut your returns by almost half over a 30-year period - the difference between $1MM growing to $3.4MM versus $6.7MM.

This time, however, let’s examine the long-term impact of a 5.75% front-load coupled with a 1% annual fee on a $10,000 investment.

The aforementioned fund partners had to charge high fees to compensate the representatives selling their products. My employer got a cut of every mutual fund dollar seeded with these companies, and I, the representative, received a percentage of that cut.

That’s great if your primary goal is sales - which is precisely what the large insurance and investment companies are seeking.

It’s not great for the clients, especially those unfamiliar with the nuances of available options.

Don’t get me wrong; those seven partners were all reputable companies. They made up the old guard of mutual fund providers. Respectable but expensive—slow to embrace a new paradigm.


Even if the commission-based financial representative offering you advice is not a sales-hungry bear, heeding their investment recommendations could have the following negative side effects:

  • High fees - a result of their broker-dealer limitations.
  • Poor performance - a result of high fees.
  • Sickness, nausea, vomiting - a result of poor performance.

If you find yourself in desperate need of investment advice, save yourself the pain and look elsewhere, rather than to an individual who only makes money when you purchase commission-laden products.

What to do instead

For a simple portfolio, including those just getting started, research and compare the many robo-advisor options. These online, automated, algorithm-based portfolio management software solutions come at a fraction of the costs. The absence of the representative from the equation will cut your fees significantly - down to 0.15% with some companies.

For a larger or more complicated portfolio, or if you just prefer working with humans, seek out a fee-only advisor who has properly aligned their interests with your own (the different types of fee-only models and their respective interest alignment is a topic for a future post).


A poor investment decision can cost you dearly in the long run. The significant potential returns made possible through savvy portfolio allocation make understanding the nuances today well worth the effort required.

A poor investment decision today can cost you dearly in the long run!

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Let me know your thoughts

  • What investment advice have you received from a broker-dealer’s financial representative? (Whether you listened or not…)
  • Am I overlooking some hidden value or advantage in trusting their advice over the alternatives (robo- or fee-only advisors)?
  • If you are a commission-based rep working under a broker-dealer providing investment advice, as always, share your side - I am, indeed, curious.

Stephen Spicer

Stephen Spicer, CFP®, AEP®, CLU® is the founder and managing director of Spicer Capital, LLC. He is married to his high school sweetheart, and they have three amazing boys.