Yesterday, a new chapter was opened in the seemingly never-ending investigation into mutual fund improprieties. Only this time, the target isn't a fund. It's a broker.
Financial Advisors, a part of American Express
According to an American Express filing with the Securities and Exchange Commission (SEC), NASD alleges that the broker was paid by certain mutual funds to make their products available through its distribution network, but didn't fully disclose these relationships to investors. The most insidious charge is that the broker engaged in a practice called directed brokerage, in which funds direct commissions to brokers who favor their products. The SEC has proposed a ban on directed brokerage. It's no wonder. The inherent conflict of interest in the practice is utterly despicable.
Fool analyst Shannon Zimmerman has said there's no good reason to invest in the funds that have been implicated in the still-unresolved market-timing scandal. I suggest the same goes for any financial advisor or broker who isn't given a clean bill of health by the SEC. Why do business with anyone who might not be looking out for your best interests?
But wait, you say. How do you tell if a broker or advisor has a conflict of interest? Fortunately, this can be pretty simple.
Advisors usually work one of two ways: by commissions or by fee. Beware of commission-based advisors, for they get paid according to what they sell you. The more mutual funds, insurance, etc., you buy, the more they make. Fee-based advisors, like the specialists at The Ayco Company who serve TMF Money Advisor customers, sell only advice, making money when their clients prosper.
It's usually also important to steer clear of brokers who have a list of preferred funds or stocks. These may be products management has told staff to push because of favorable payments or a high inventory of shares that they need to unload. Your bottom line likely won't factor into their sales pitch.
Though it may be easy to get discouraged by the never-ending stream of scandals, yesterday's news is a delight for the Foolish investor. For too long, Wall Street has been set up to line the pockets of insiders. But each time a new scandal unfolds, the old system steps a little deeper into the grave it has dug for itself.
Tired of the investigations? We are too. Fortunately, we can help. Visit our Broker Center to get more information on how to find a broker you can trust. And check out Shannon Zimmerman's Motley Fool Champion Funds to find those rarefied mutual fund managers who are working on your behalf to beat the market.
Fool contributor Tim Beyers thinks the Wall Street old guard resembles a tired pro athlete overstaying his welcome in the big leagues. He doesn't like baseball's designated hitter rule, either. Tim owns no interest in any company mentioned, though he is a TMF Money Advisor subscriber. You can view his Fool profile here.