February 16, 2004
I do not believe that the disclosure is necessarily enough to protect investors. Even though I believe that if nothing else is being done commission disclosures will help, they will do little to discourage brokers/dealers in recommending funds that are more in their interest than their clients.
Specifically I forsee this scenario as investor. If I go to my broker and ask him what his commissions would be for all the funds that he is offering, then he will have to provide me with that information. What this disclosure does not do is prevent him from not even offering funds that do not provide him with high enough a commission.
So if we assume that all the portfolios that are in existence are funds A, B, and C where the funds pay commissions as follows:
A pays the broker nothing
B pays the broker 10 per share
C pays the broker 12 per share
If the funds produce at least historically results that would suggest that I should invest in A, then B, and then C, then my broker may still not have any incentive of suggesting fund A or even offering it. In fact my broker may offer funds B and C, show me the commission schedule and suggest fund B, because it offers better returns. Now I as an investor may feel that he has suggested the best possible fund, given that he did not suggest the fund with the highest commission paid to him. As an investor I may simply not be aware that fund A even exists.
To make a long story short, I believe that broker/dealers ought to be mandated to act in the best interest of their clients. After all as an investor I choose a mutual fund over stocks for only 2 reasons.
The first is that transaction costs for the mutual fund ought to be far lower than if I personally invested small amounts of money into individual stocks. This is only a benefit as long as fund management, marketing, and sales cost are being kept low.
The second and in my opinion more important reason is that I simply do not have the time to do due diligence on all stocks available for sale, that would make me comfortable enough to invest in individual stocks and be comforted that I had chosen the best possible one.
In order to compell the broker/dealer to act in the best interest of their clients I believe that all sales commisssions and incentives even if they are as small as T-Shirts, sporting event tickets, etc. need to be made illegal. I believe brokers should be paid a service fee for the service they provide to me as a client, by me as a client and then act accordingly with no other incentives than to serve me well.
I would hope that the SEC would consider not assuming that investors are informed about all their investing actions as we uninformed investors do not have the time to do all that research, but expect our brokers to do it for us.
I appreciate that you provide this forum to give feedback and would appreciate to hear from you if this feedback was valuable.