Does Your Broker Have Your Best Interests at Heart? It’s Complicated…

I don’t know if this is still a TV commercial in America, but maybe you remember it.  

Some random guy successfully operates on a patient in a surgery suite, then lowers his mask and a nurse says, “You’re not Dr. Stewart.” 

“No. But I did stay at a Holiday Inn Express last night.” 

That image—the idea that you can be smarter for reasons other than the obvious—came to mind as I read two emails that arrived from readers last week. They both touch on the same theme: the challenges of dealing with financial professionals too scared to venture beyond their prescribed box. 

To wit, this bit from one of the emails from a reader who has an account “managed by a brokerage whose investment strategy is ‘slow and steady, and try not to lose money.’ While I appreciate their dedication to not losing value, they don’t recommend investing in alternative investments” such as those that I regularly recommend in the Global Intelligence Letter.  

This reader explains that he feels “caught between two worlds of ‘what I am advised to do by my money guys’ and ‘what I’d like to do but am advised against.’ Your articles really stretch my vision, and I am realizing my myopia as to what ‘money’ and ‘investment’ should look like.” 

So, before we venture any further, let me say this: I totally understand where this reader’s adviser is coming from. 

Along with my years as a Wall Street Journal personal finance and investment writer dealing with the inner workings of Wall Street, brokerages, and financial planners every day, I also worked as a trader/analyst for a hedge fund.  

As part of that, I studied for and obtained my Series 7 license, the credential issued by the Financial Industry Regulatory Authority and which pretty much all financial pros in the U.S. must have to work with the general public. 

It basically tests your knowledge of financial instruments and, more relevant to today’s dispatch, it gauges a candidate’s competency with risk and retirement planning. 

Which is why I say I totally get where the adviser is coming from: a position best defined by the phrase “cover your butt.” 

Mainstream financial planners working at Main Street brokerage and planning firms are generally not allowed to think outside their prescribed sandbox. Their firms require clients to complete risk-assessment profiles, which planners/brokers then plug into a paint-by-numbers algorithm that spits of an approved list of investments. 

And you don’t veer from the prescription for fear that a client will sue if the investment goes sour. By showing a court (or, more likely, an arbitrator) that all clients with Risk Profile X get this set of investments, a firm has effectively covered its butt. 

As is often the case, of course, what’s good for Wall Street is not good for you and me. 

The Main Street planning industry’s approach to investing is the equivalent of George W. Bush’s No Child Left Behind education policy, which is more accurately termed “Every Child Mediocre.” You end up with bland, milquetoast investments that muddle along. 

The reader who sent me the question made a very astute comment when writing, “I somehow have a feeling that the brokerages don’t always want us to find the best value for our money, and that they probably invest in alternative investments themselves.” 

That comment is 100% dead-on accurate. 

All these firms manage their own money much differently. Sure, they hold conservative assets, but they also put a portion of their money into all sorts of risk-based ventures. Why? Because that’s where the better opportunities are to generate a meaningful return on assets—or because the firm sees something unfolding in the economy that they’re preparing for themselves. 

Look no further than JPMorgan.  

Jamie Dimon, who runs the joint, stated just recently that the firm itself is dumping U.S. Treasury debt to build a $500 million cash hoard because it fears inflation will be much more than a transitory affair. (Inflation will trash bond returns; cash will do better because cash rates almost immediately reflect rising interest rates—once the Fed gets around to actually raising interest rates.) 

But is JPMorgan pulling clients out of Treasury debt and letting cash pile up in individual investor accounts? I don’t know for a fact, but I suspect I know that answer. 

I will say this: I realize that some of the assets I recommend hit differently when it comes to the way mainstream Wall Street views assets. But I do explicitly think about my readers when it comes to the investments I recommend. 

I’m 55 and I think, “Would I put my cash into this?” 

My stock, ETF, crypto, and currency picks are not crazy-risky. They’re just…different. 

They’re not investments that traditional brokers/planners opt for because A) the investment is not on an approved list and B), they don’t have any clue about the asset.  

By that, I mean that I’ve literally traveled the world (nearly 70 countries) researching economies and companies in major markets such as Hong Kong, Tokyo, and London, and frontier markets such as Cambodia, Ghana, and Romania. I’d venture a bet that not many Wall Streeters can compete with that knowledge base of global opportunities. 

Moreover, I try to be ahead of the curve.  

I was telling Global Intelligence readers about inflation and a weak dollar long before it started popping up in mainstream headlines. I began writing about a commodity super-cycle earlier this spring, and now that term is just beginning to creep into some secondary and tertiary media outlets. 

The point is that when you’re ahead of the news cycle, the investments you recommend seem “out there”…until suddenly they’re directly in the bullseye of the market. 

So, what are average people like us supposed to do? 

Some firms will allow you to call the shots on a certain percentage of your money that it manages—but it’s like pulling teeth to get to that point. Still, you can try. 

If that fails, the only option is to have cash on the side in a self-managed brokerage account, or in a crypto account if you don’t mind the risk inherent in crypto. 

So, my letter writers nailed it. They’re not brokers and planners, but they clearly stayed at a Holiday Inn Express last night.