Are There Still Wolves on Wall Street?

After sitting through 3+ hours of drugs, nudity and debauchery depicted in Martin Scorsese’s “Wolf of Wall Street,” my wife was appalled to learn that the movie was based on a true story of Jordan Belfort. Her immediate reaction was: “At least that doesn’t still happen… Does it?” And she isn’t the only person who has asked me that. 

While it might not be happening with the same Hollywood flair, you’d be shocked at just how much the film’s cocaine-fueled mentality still permeates the culture of financial advisors around the country. And if you think that after decades of Wall Street’s bad behavior, regulators would surely have things under control by now, you’re in for an even bigger shock. 

Take advisor Christopher Veal for example, who just last year reportedly charged an 81-year-old retiree $320,000 in commissions for an $870,000 account over a period of 18 months. The fact that he was still in business is even more appalling, given his checkered track record with more than 17 firms—including Stratton Oakmont, the firm led by Leonardo DiCaprio in the film.

Countless stories like this show that the answer to my wife’s question is indisputably yes—there are still plenty of advisors out there taking advantage of investors. And this isn’t likely to change much because of one simple fact: commissions.

 If advisors’ compensation structure varies based on the advice they give, what you’ve created is an industry full of salesmen. Human nature dictates that if you pay someone a commission to sell used cars, or anything else, you intrinsically create an incentive for the salesman to promote what’s best for his paycheck.

This isn’t saying that salesmen have bad intentions. But, if you go to a Toyota dealership and ask them whether you should buy a Toyota or a Subaru, do you think that you’re going to get an impartial answer?  

When most consumers go car shopping, they know up front how the salesman is going to be paid. With financial advisors, however, they don’t. When a customer has a choice of whether to invest in a low-cost fund or one loaded with fees, how is she supposed to make an informed decision when (a) she doesn’t realize that those fees exist, and (b) her advisor and his firm are paid a good chunk from those fees? 

The industry’s relentless lobbying has ensured a regulatory environment that keeps consumers in the dark. Most advisors are held only to a “suitability standard,” which means they can put their own interests ahead of the clients’ as long as their recommendations are “suitable” for the clients. In other words, brokers can legally put their loyalty to the company writing their commission checks over their clients.

There are some advisors, however, who are bound by a higher “fiduciary standard,” which legally requires them to put their clients’ best interest first and foremost. Attorneys and numerous other professionals are bound by the same standard, but despite a large push by consumer advocacy groups to expand it to commissioned brokers, the big Wall Street firms have successfully fought off the measure. 

So, perhaps your question shouldn’t be whether your advisor is the next wolf of Wall Street. Instead, ask how they get paid and if they’re a fiduciary.