Beware Investment Advice from a Broker-Dealer: Part 2 - Spicer Capital

Beware Investment Advice from a Broker-Dealer: Part 2

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

So what's the lesson to be learned from our two observations in Part 1?

Lesson Learned: Don’t Take Investment Advice from a Commissioned Broker

Here are two primary reasons:

  1. Their limited-to-no access to passive funds.
  2. Their limited investment knowledge.


    1. Passive access denied

    Most commission-based financial representatives working for broker-dealers are not supposed to recommend passive investment vehicles. These funds are not in their arsenal. In fact, the reps are often contractually obligated to recommend the actively-managed investment options from companies with which their firm has partnerships.

    This reality exists because there is no commission split for the firm or the representative if one was to recommend a passive fund, like Vanguard.

    2. Limited investment knowledge

    Registered representatives of broker-dealers have no incentive to understand investments beyond the basics. They just have to appear investment-savvy in front of a client. They need to know enough platitudes to convey some degree of expertise.

    Beyond that, however, there is no reason (other than an individual’s passion for personal growth or for the subject itself) for a rep to expand her investment knowledge. Most of my counterparts at my old firm lacked expertise in this area. In fact, most demonstrated absolutely no desire to learn! That was even the case for me during my first several years, for that matter - I blindly did as I was told and said what I was supposed to say, like any successful rep.


    Of course, there are always exceptions. I am sure there is a stockbroker (or two…) in the world with an insatiable desire for greater investment knowledge. But they would be just that—the exception, not the rule.

    Perhaps more likely, they're simply not yet aware of the possibilities outside their restrictive commission-based structure (see “How Do Good People Become Commission-Based Financial Reps?” and send them my way to help with their reform!).

    Even if you find a truly knowledgeable rep, the aforementioned passive fund problem persists.

    Most registered reps you find slinging investment products, however, just want to sell; they have no extra time to invest in learning.

    Even being a top investment producer offers no guarantee

    To help with a particular high-net-worth client, I had the privilege of working alongside a rep who was on the short list of fastest growing investment practices at my former firm. I looked up to this guy.

    After our meeting, he noticed how interested I was in building my investment practice. He took me aside briefly to share his insights. He told me his secrets!

    The big surprise? He didn't understand investments -- at all.

    That wasn't just my assessment; it’s what he told me: he did not understand investments.

    He hired someone with a fancy title - she had managed a couple billion dollar account previously - and he sold that idea to his clients. Then, he told her to work with the firm’s home office staff to build his clients’ investment portfolios.

    Here was one of the firm’s “top investment producers:”

    • He was gaining his clients’ trust,
    • Taking control of their investment assets,
    • And then passing it off to his staff to invest on the clients’ behalf in vehicles he - admittedly - did not understand.

    His investment manager did the job she was paid to do: work with the home office and invest client funds within company guidelines.

    Who was supposed to look out for the clients’ best interests?

    He couldn't - due to his limited investment knowledge. Was it her job...?

    I don’t claim to know whether or not she objected to those corporate recommendations, but what were her options if she did? Quit? Get fired so he could hire someone else who would just invest the way the company directed without question?

    Something seemed off to me.

    Maybe you disagree. But I was disappointed.

    Even a CFP® might disappoint

    Finally, because the rep has their Certified Financial Planner® designation does not guarantee they know anything more than basic investment rhetoric. It was about a year after obtaining my CFP® before I really began to study investment concepts to any degree beyond a surface-level understanding.

    The CFP® designation doesn't guarantee investment expertise...

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    Find further evidence in the quote I shared previously from one of my good friends:

    Yeah, I wish I had better stuff to offer, but it's what I'm stuck with right now. Not sure what other options I have within the context of [my firm].

    • He is a CFP® professional.
    • He is one of the kindest people I know!
    • He knows his investment product offerings are subpar.
    • Yet he pushes them anyway.

    The higher CFP® standard to which he is held does not stop him from shortchanging his clients (and he is by no means the only “expert” guilty of this).

    Even the CFP® badge cannot protect you, Mr. or Ms. Client, from a registered representative.

    To Better Protect Your Life Savings, Remember...

    Registered representatives are not necessarily investments professionals. In general:

    • They lack investment experience.
    • They have limited access to passive funds, which should be included in most investors’ portfolios.
    • And they have little incentive to gain more than a basic knowledge of investments.


    If you would like assistance from an investment professional, seek out an investment professional!

    Find a fee-only CFP® who performs investment research and never stops learning

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    Let me know your thoughts

    • Have you ever caught the person trying to sell you investment advice in a lie?
    • For the investment-savvy: What are some questions people should ask their financial rep to gauge investment knowledge?
      • Essential things any investment professional should know.
      • How you see through canned responses.

    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.