Medicare Part DHow does a Broker live on $35.00 per year? Why do they sometimes tell you that. What do they hope you will never find out ?

Bequeathing Your Assets to Your Broker


William J. Bernstein

A hoary piece of stockbroker lore has a young broker asking a senior partner at the firm about his proudest accomplishment.

The reply: "over the years I've gradually transferred the asstes of my clients to my own name"


Awareness of investing expense has heightened in recent years, and it is instructive to examine the truth of this old joke. Imagine for a moment that you inherited $100,000 at age 25. Not long after an enterprising broker at a "full service" firm calls and offers you his services. He is quite personable and always seems to have a snappy explanation for the behavior of the market; you engage his services. Considering your conservatism, he invests your portfolio in a 50/50 mix of common stocks and bonds.

What can you expect in the way of long term return? What will become of his commission stream? The first question is easy to answer. Assuming that he is of average ability, this mix will produce a long term return of about 8%. (The long term return of common stocks is about 10%-11%, of long term corporate about 5%-6 %.).

Unfortunately, your return will not be that high. Whether you use a "wrap" account or employ a straight commission basis, fees will reduce your returns by approximately 3% per year -- to about 5%. This is only 2% greater than the long term inflation rate of 3%.

This is discouraging enough. Now consider what the broker accomplishes with your commissions. He now has a steady income stream, consisting of 3% of your assets each and every year, to invest. He should also earn the same 8% return, but his investment return will not be substantially reduced by commissions and fees.


The graph shows that in 24 years the brokerage will have parlayed your commissions into a sum equal to your own. When you retire at 65 you will have amassed $704,000. Your broker has done far better; he has produced $1,542,000 with the commissions from your account.

To calculate your mutual fund fees click here....

The calculation is somewhat artificial. The grim reality is actually much worse. Since your broker will be turning over the assets in your account with some regularity to earn commissions and/or justify their fees, this will generate significant capital gains. Taxes on these gains, as well as your bond coupons, will reduce your investment yield about 3%, just keeping up with inflation. In contrast the broker will most likely manage his assets with little or no turnover, further widening his asset advantage.

For the full service brokerage customer, then, the old broker's remark is no joke -- eventually, your broker will wind up with more of your own assets than you do. For the no load fund investor, things are a little brighter, but still fairly grim. Assume Fidelity charges you 1% in expenses to manage your portfolio. Under the above 40 year scenario, this leaves you with $1,479,000, but Uncle Ned still earns $722,000 for himself. Vanguard should be able to invest your assets in their index funds for about 0.25% -- the numbers here are $1,980,000 for you, $169,000 for them.

Obviously, Paine Weber, Fidelity, and Vanguard do not get to keep all of their expenses. Fidelity will use a large part of their management fees for advertising, enabling them to manage an even greater portion of the wealth of Western Civilization. Vanguard's expenses are so low that it is doubtful that there is much profit margin. In any case, Vanguard is actually owned by its funds' shareholders; Most brokers are getting terribly rich at your expense.

So, keep an eye on those expenses. Thank you, Paine Weber (Merrill Lynch, Smith Barney, etc., etc.).



Is my Financial Advisor a Fiduciary or a Stockbroker?


Written by Ethan S. Braid, CFA


Is my Financial Advisor a Fiduciary or a Stockbroker?


What is the fiduciary duty and why is that important?


The fiduciary duty requires an investment adviser, by law, to act in the best interest of her clients, putting her clients’ interests ahead of her own at all times. Under the fiduciary duty, an investment adviser must provide advice and investment recommendations that she views as being the best for the client. In addition to being obligated to put clients’ interests ahead of their own, fiduciaries must also adhere to the duties of loyalty and care. An investment adviser, subject to the fiduciary duty, is required to provide up-front disclosures to the client, before any contracts are signed to provide investment advice. These disclosures cover important topics such as the investment adviser’s qualifications, services provided, compensation, range of fees, methods of analysis, record of any disciplinary actions and possible conflicts of interest, if any. An investment adviser that has a material conflict of interest must either eliminate that conflict or fully disclose to its clients all material facts relating to that conflict.


The world of investment advice is plagued with conflicts of interest, obscure disclosure and an overall lack of transparency.  Seeking out an investment adviser who will act as your fiduciary can help to eliminate many of the problems associated with commission-oriented, product focused salespeople. Because a fiduciary is required, by law, to give full disclosure of how they are paid as well as any conflicts of interest they may have, before you do business with them, you as the consumer are in a better position to make an informed decision.



How is a stockbroker different from a fiduciary and why should I be concerned?


A stockbroker is defined as any person engaged in the business of effecting transactions (buying and selling securities - trading) for the account of others. Brokers have many different titles these days with some of the more common being:  wealth manager, wealth advisor, investment consultant, financial advisor, financial consultant and registered representative. 


Regardless of their title, stockbrokers are generally not considered to have a fiduciary duty to the client. Stockbrokers are able to avoid the higher legal standard of the fiduciary duty due to an exemption they receive from the definition of Investment Adviser (fiduciary).  This exemption, which can be found under section 202 (a) (11) (C) of the Investment Advisers Act of 1940 reads:  any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor.  In other words, in the eyes of the Investment Advisers Act of 1940, brokers are generally not considered to be fiduciaries because their advice is merely incidental to the sale of their products.  Instead of being obligated to put their customers’ interests ahead of their own, brokers are instead expected to deal fairly with their customers and adhere to the lower standard of legal care, known as the suitability doctrine. The suitability doctrine requires a broker to know her customer’s financial situation well enough to recommend investments that are considered suitable for that particular client.

Brokers are not required to provide up-front disclosures like the ones required for investment advisers.


As a consumer, caution should be exercised when dealing with a broker.  Because a broker is only required to establish suitability, she is not legally obligated to put your interests ahead of hers. She may in fact sell you the investment that pays her the most commission, so long as the investment is deemed suitable.  She is also able to sell you proprietary products if her firm offers them. Finally, she may be subject to conflicts of interest that could influence her investment recommendations while at the same time not being required to disclose those conflicts of interest to her client.


Who is a fiduciary and who is a stockbroker?


Investment Adviser (see Investment Advisers Act of 1940) means any person who, for compensation, engages in the business of advising others, either directly or indirectly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as a part of a regular business, issues or promulgates analyses or reports concerning securities. Investment advisers are subject to the higher legal standard of care known as the fiduciary duty. Investment advisers also use a number of titles in addition to investment adviser, such as:  investment manager, portfolio manager, wealth manager, and asset manager. Investment advisers provide ongoing advice and investment management based upon the client’s objectives. Typically the investment adviser is given discretionary authority over the client’s investments.  Discretionary authority allows the investment adviser to make investment decisions in the portfolio without having to get prior approval from the client. Investment advisers carry a license called the “series 65 or series 66.”  Investment advisers are monitored by either the U.S. Securities and Exchange Commission (SEC) or state regulators.


Stockbrokers (also called Financial Advisors, Wealth Managers, etc.)  are subject to the lower legal standard, known as the suitability doctrine (stockbroker).  Most of the financial advisors working at the largest Wall Street Brokerage firms (wirehouses) fall into this category.  Brokers carry a license called the “series 7." Brokers are monitored by the SEC, state regulators and industry self-regulatory organizations.


Dual Registration can make the legal situation very confusing. Today, a large number of financial advisors serve as both investment advisers and brokers. According to a FINRA study, 88% of investment adviser representatives are also registered as brokers. For example, you open several accounts with a financial advisor employed by one of the major brokerage firms. The advisor may sell you a “fee-based” account where she acts an investment adviser and concurrently sell you bonds or limited partnerships in another account where she gets a commission (which you may not even see) and functions as a broker. Which hat does she want to wear today and how much does she want to get paid?  The biggest issue for clients of dual registrants is that ultimately the lower legal standard typically applies to the dual registrant wirehouse broker who can function as both an investment adviser and stockbroker. 


Insurance Licensing is also common for many brokers and investment advisers. Insurance products can have massive embedded commissions and present significant conflicts of interest for financial advisors. These conflicts of interest are generally not disclosed and the fiduciary duty is not followed.

How can I tell if my adviser is a fiduciary or a stockbroker?


  • Look at the disclosures on the advisor’s website, marketing materials and business cards.  Brokers who sell products & dual registrants will have disclosures that look something this:

Company XYZ makes available products and services offered by XYZ, a registered broker-dealer and Member Securities Investor Protection Corporation (SIPC). Insurance and annuity products are offered by DDT, a licensed insurance agency and wholly owned subsidiary of XYZ.


Banking products are provided by XXY, Members FDIC and wholly owned subsidiaries of XYZ


  • Ask, “Are you legally obligated to put my best interests ahead of yours?” “Will you be serving as my fiduciary?” 
  • Ask, “Will my account be an advisory account or a brokerage account?” An answer of brokerage account will be your clue that you have found a stockbroker or dual registrant.
  • Ask to see the advisor’s form ADV. The form ADV will describe, among other things, fees & compensation, types of clients, disciplinary information, conflicts of interest, and education.  If the advisor cannot provide you with an ADV, then the advisor is most likely a broker. Bear in mind that just because you get an ADV however, doesn’t mean that the advisor doesn’t also put on the broker hat from time to time if she is dual registrant.
  • Ask if the advisor is fee-only or “fee-based”.  Fee-only advisers will be fiduciaries. Fee-only advisors cannot legally accept commissions and their only source of revenue is the fee they charge for advice and investment management.  Since brokers are commission oriented, they cannot legally hold themselves out as fee-only.  “Fee-based” however is a very different story. A“fee-based” advisor offers advisory accounts as well as brokerage accounts and is a dual registrant.  So while she may put on the advisory hat one day, the next day she might put on the brokerage or insurance agent hat to sell some limited partnerships or annuities.
  • Ask what licenses the advisor has. A “series 7 license” means the advisor is registered as a stockbroker (the series 7 is the broker examination).  The series 65 or 66 means she is registered as an investment advisor.  Having both the series 7 and 65/66 equates to dual registration, which brings about the problems we covered previously in this article. Having an insurance license means she can sell you life insurance and annuities and accept commissions.


Why do Conflicts of Interest Matter?


According to Merriam Webster, a conflict of interest is defined as: a conflict between the private interests and the official responsibilities of a person in a position of trust. 


If you are a client at a Wall Street Bank/Brokerage firm, you will likely be exposed to significant conflicts of interest.  You are a client because you are looking for advice.  However, what you receive may be something very different. These firms are in the business of selling products and producing a profit for shareholders. As brokers, exempt from the definition of investment adviser, advice from their salespeople is typically considered incidental to the sale of products they are promoting or helping you buy.  In other words, broker dealer firms are there to facilitate a transaction on behalf of the customer, with the focus on the transaction and not the advice.  Also, as we learned earlier, many advisors at these firms are able to switch hats on a whim playing broker one minute and advisor the next. The broker’s ability to offer both advisory and brokerage accounts creates serious conflicts of interest. These conflicts are often centered on how the broker gets paid.


To demonstrate just how deep the conflict can be, let’s consider an example. Suppose that a woman named Sue recently sold her company and has decided to retire. Her husband, Bob, a recently retired executive, has a pension that provides for most of the couple’s living expenses and they have no debt.    


Hypothetical Clients Sue & Bob


Age:                                                    65 years old

Children:                                             3                     

Grandchildren:                                    4

Total Investable Assets:                      $5.0 million dollars

Net worth:                                           $6.50 million dollars

Pension & Soc Security:                     $100k annually

Goal:                                                   $150k annually in portfolio income


To keep this example simple let’s just focus on what can happen when Sue and Bob walk into the office of a dual registrant, insurance licensed salesperson at traditional Wall Street Brokerage firm. 


Example options A & B (in terms of payment to the stockbroker):

  1. A.The stockbroker shows the clients a $1m variable annuity with a 7% commission and a $4m investment in bonds, limited partnerships & structured notes at an average of 3% commission.

Result is an immediate non-transparent commission of $190,000 to the stockbroker.

  1. B.The stockbroker shows the clients a $5m balanced wrap mutual fund advisory account at a 1% annual fee (paid at .25% quarterly)

Result is an immediate fee of $12,500 to the stockbroker.


You don’t have to be very good at math to see that by changing the product mix, the stockbroker can dial up or dial down how much he or she gets paid. Does the stockbroker want to get paid $190,000 or $12,500 this month?  What a dilemma! To add insult to injury, in many cases, especially with annuities and investment bank products, the commissions are not transparent and difficult to gauge.


This payment scheme should certainly cause you to think twice about where you get financial advice. Caution should be exercised with dual registrants, especially those who are also insurance licensed. Do your homework. Ask lots of questions. Be critical of anything with a huge prospectus – these investments generally enrich the stockbroker completely at your expense.


There is a better way to receive investment advice – work with a fee-only advisor who is subject to the Investment Advisers Act of 1940 and operates as a fiduciary for clients.  There is a great comfort that comes in knowing your advisor is putting your interests ahead of her interests and not merely selling you products for commission. 

Senior Care of Texas and its representatives are Licensed throught the Texas Department of Inusrance. While some have the Series 65 License. The additional agents are working tward getting their 65 License as well. Obtaining the series 65 license takes between 6 months to 12 months to prepair. We chose to stay away from Series 6-63 and Series 7. It is a requirement to obtain the series 65 License by our founder.

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