Why Many Brokers & Advisors Neglect Their Clients

Most Brokers will begin to neglect you when the financial incentive to continue servicing your portfolio is gone. Sadly, most Brokers reach this point as soon as they figure our that you don’t have any additional money to invest (to generate their new commission for them) or won’t agree to any additional near-term purchases.

Occasionally, a Broker or Adviser is simply lazy and will therefore neglect his/her investor clients out of such laziness, but usually, if the potential for compensation is large enough, even the lazy ones will contact their clients to try to generate an additional commission.

What’s YOUR style?

My post titled “Typical Investment Industry Compensation Models” regarding Broker/Advisor compensation schemes provides a great deal of background information for this post.

Most Brokers or Advisers will fall under one, or both of these methods of compensation.  A Broker will typically receive an upfront commission on a “transactional” basis each time an investor purchases an investment product.

That same purchase transaction may generate a significantly smaller “trail” commission for several years after the initial purchase, but this commission is much, much smaller than the original “up-front” commission and these “trail” commissions generally don’t become a significant percentage of a Broker’s income until several years worth have been generated and can be added together.
In contrast to Brokers, most Advisers are either compensated on a “fee only” basis or charge an ongoing “management” fee for managing your investments on an ongoing basis.

Most “fee only” advisers charge a flat hourly fee, or a pre-determined, flat fee to either give investment advice or actually assemble and deliver a formal financial plan.

“Fee only” Advisers are not typically guilty of neglecting their clients unless they are simply incompetent.  The “fee for service” structure of this arrangement is usually of such short duration that neglect does not become an issue.

Those receiving a “management” fee for actually managing your investments will typically charge between 0.50% and 2.0% of your annual invested balance, or “assets under management” and may collect the fee on a quarterly basis by redeeming enough of your investments to pay the fee, or allowing you to pay the advisor with other funds.

This is a moot point for many investors because most investment advisors, and the companies they work for, won’t open advisory accounts for less than $50,000 and many won’t offer their services for less than $250,000 in investable assets.

Therefore, the small investor, or the investor just starting out with a modest amount to invest, will not even have access to this type of management.  Forcing them to work solely within the “Broker” model.

ADMINISTRATIVE BURDEN

OK. Admittedly, this all sounds like an attack on all Brokers and Advisors.  It is not.  While there many, and I believe a high percentage, Brokers and Advisors that do operate as described above, I also believe there are some honest, well-meaning ones out there too.  However, even good intentions may not be enough to prevent them from delivering progressively bad service and ultimately neglecting their clients.

There is an administrative burden that grows as each Broker/Advisor brings on more and more new clients.  Each client brings with them the burden of increased paperwork, liability and overhead.

After a few years in the business, Brokers begin to experience a battle for their time.  As a Broker’s “book of business” grows, their clients servicing needs also grow.  More service calls for beneficiary changes, bank collateralization forms, IRA withdrawal requests, etc.

A Broker will either have to allocate increasing amounts of their own time to perform these duties, or hire administrative staff to perform these tasks.  Administrative staff = direct cost to the Broker.  Even when administrative staff is hired, investors may still be neglected by the Broker/Advisor as they encourage investors to deal directly with staff and limit access to their expertise and time.

In the past, some Broker-Dealer firms have offered expense sharing or expense reimbursement plans for office or clerical expenses for their brokers.  However, qualification for these expense sharing programs has been dependent on a Broker’s production level.  This obviously provides a Broker with an incentive to make new sales.

There has been much debate regarding any type of compensation or reimbursement scheme that might incent a Broker to make a recommendation strictly for generating more sales rather than providing for the investor’s best interest.

YOUR BROKER MAY FIRE YOU

Most Investment Advisors, acting as investment mangers, may begin to neglect their clients once a client’s portfolio balance begins to drop, or if the client’s portfolio balance begins to drop relative to other clients being managed by the advisor. Most advisors are smart enough, and the industry preaches the virtues of, managing to the advisor’s top clients.

Since an Advisor’s income in a “money management” or “advisory” scheme is a function of the management rate being charged, let’s say 1%, and the amount being managed, it is easy to see that managing money for ten clients with $5 million each is preferable to managing 50 clients with each investing $1 million. In this example, the Advisor would receive the same 1% of $50 million whether managing ten clients or 50 but the administrative burden would be significantly less with only ten.

Accordingly, as the Advisor brings on new clients that have more to invest than you do, you will effectively move down in your rank of relative “value”.

If an Advisor successfully “grows” their “Assets Under Management” by bringing on enough clients with substantially more to invest than you have, you may find yourself being neglected by an Advisor that used to be very attentive to your portfolio.

Either you will receive less and less service, ultimately conflicting with your investment contract, or the Advisor and related company will “introduce” you to a junior advisor within the firm, or terminate your investment management agreement and leave you to find another Advisor.

This may not occur immediately in a “down” or “bear” market, as the Advisor will typically experience an overall reduction in income during a “down” market and be more agreeable to manage and service even their smaller portfolios.

But be aware, when the market begins to turn upward and good times come back, your relative “value” to the Advisor may decrease to such a level that they effectively “fire” you.

Many Brokers and Advisors will speak in terms of “firing” their smallest, least financially productive clients.  Many times investors don’t even recognize the neglect because it occurs over a long period of time.