Some Things Never Change…

The sun rising in the east, human ingenuity, the changing of the seasons, wars, and conflicts in the financial services industry.  These are just a few things that will never change.

I joke, but not really.  I hesitate to say that this new story was shocking, since it is something I've now come to expect:  Morgan Stanley Purges Vanguard Mutual Funds.  It is not at all uncommon for a brokerage firm to remove a fund company from its platform, but in this instance, when you read the reason why you'll probably be as upset as I was:

Brokers and consultants said that Morgan Stanley is almost certainly retaliating against Vanguard because of the Valley Forge, Pennsylvania-based firm’s longstanding refusal to pay for brokerage firm “shelf space” as part of its crusade to keep expenses for investors low.

With all of the "fiduciary" talk continuing to pick up steam, Morgan Stanley (and Merrill Lynch who is also mentioned in the article) have decided to not allow the largest fund company on the planet to offer its funds on their platform.  Not because of poor performance or high risk to shareholders, but because they wouldn't pay-to-play.  Because Vanguard's mission of keeping costs low for shareholders cannot co-exist with Morgan Stanley's need to make a profit.  And our industry wonders why we get a bad reputation?  This is exactly the reason we started Greenspring 13 years ago.  Several of us left the organizations mentioned in this article because we wanted to do what was in our client's best interest.  That often times could mean investing in the lowest cost mutual funds on the market.  Now Morgan Stanley is saying that won't be possible.  As we've said before, if you work with a broker at one of these groups, they are not necessarily bad, but the system is set up against you.  Don't hate the player, hate the game.



If It Sounds Too Good To Be True…

In Baltimore there is an investment firm that has flooded the airwaves with radio and TV shows guaranteeing 7% returns with no downside risk. Those of us who act as fiduciaries to our clients scoffed at these infomercials, but it didn’t take long for our clients to start calling us, asking why they weren’t invested in these can't lose investments. For the record, these “advisors” were pitching different types of annuity products to their unsuspecting clients. If you want to learn more about how these products work (warning: it’s complex), click on this short webinar I created to try to de-mystify these investments.

Getting back to the topic, as clients would call us explaining what they heard, the conversations usually went something like this:

Client: I just heard about these investments that guarantee you get a 7% return OR the return of the market, whichever is greater. Why aren’t we investing in things like this?

Greenspring: Were you listening to the “Money Guys” on TV?

Client: That’s it, have you heard of them?

Greenspring: Yes, but let me ask you a question, “How can someone guarantee an investment return of 7% OR the return of the market, whichever is greater, if guaranteed investments like treasury bonds are earning 2%”?

Client: I’m not sure, but that’s what it is.

Greenspring: I wish it were so, but the one thing I know from working in this field for a long time is that if it sounds to be good to be true, it probably is.

At that point, I would explain the product and how terrible it is. Thankfully, I don’t believe we’ve had any clients buy these products after we explained how they work.  As much as we all know deep down that there are no free lunches, I am amazed how many people still want to believe it. Fast forward to today, this investment firm has been permanently barred from the investment advisory business for “fraudulently misrepresenting the risks of their investment strategy”. The old adage about being too good to be true, is proven right once again.

Is Your Advisor a Part-Time Fiduciary?

When you visit a doctor, you probably assume that he/she must do what is in your best interests and not what maximizes that doctor’s income. And you would be correct. Unfortunately, the same cannot be said with financial advisors. Being a fiduciary means that an advisor must legally put the client’s interests first, ahead of the interests of the advisor. This seems pretty basic to us at Greenspring – we have been following the fiduciary standard 100% of the time for 100% of our clients since our founding over 12 years ago.

However, the majority of advisors are not fiduciaries 100% of the time. There are several methods and loopholes to avoid being a fiduciary. You may have recently seen in the news that President Trump has ordered a review of a rule that was going to require the fiduciary standard with certain retirement accounts. Even if this rule does end up going into effect, it still only impacts those retirement accounts, not all accounts or investment products pitched by advisors. In addition, advisors are allowed to register with the government in a few ways, which lets them be a fiduciary when it comes to some activities but not a fiduciary when it comes to others.

Due to these complexities, our recommendation is to utilize a fee-only advisor such as one found at (an association of fee-only advisors). Fee-only advisors are already subject to the fiduciary standard in all situations for all clients.

So the next time you see a financial advisor, ask them – Are you a fiduciary 100% of the time, or only when the government requires you to be? You might be surprised at the answer.

The Worse The Product The Higher The Commission

If there was still any doubt that brokers have been selling clients products that aren't in their best interest, this should put it to bed.  An article in Financial Advisor magazine reported the following:

Through August, sales of non-traded REITs were $3.15 billion, down 55 percent from the same period a year ago, according to the Robert A. Stanger & Co., which tracks the industry.

Sales of BDCs through August were $1.07 billion, down 62 percent.

Non-traded REITs, the bigger category, should reach around $5 billion this year — about half of last year — said Keith Allaire, managing director at Stanger.

What are non-traded REITs and BDC's you ask?  These are products with high commissions and fees (sometimes over 15%) with countless examples of massive blowups.  In this day and age with Google, it is hard to believe they still exist in their current form.  Just google "non-traded REIT scam" you'll find over 17,000 hits with the first few links being stern warnings from the SEC and FINRA.  The old adage that these products are "never bought but sold" is entirely correct.  You almost exclusively see these products sold by brokers.  So, what is the reason for the massive drop-off in sales?  The article states it pretty clearly:

"That's primarily due to the change from full front-load structure, to a trail commission structure," he said. "It's a matter of getting new products in the pipeline, and at B-Ds trying to figure what structure they want on the platform."

Translation:  cut out the big commissions and brokers won't sell it anymore.  This goes to show you that little concern was given to the quality of the product (anyone looking closely at these things knew that a long time ago) or the client.  The appeal of these products was always about the huge upfront commissions.  With the advent of the Fiduciary rule, requiring all brokers advising retirement accounts act in the client's best interest, it seems like some of these horrible products are seeing asset flows dwindle.  That's a great thing for consumers.

If you are in the market for an advisor, I urge you to find one that always acts in your best interest (not just for retirement accounts) so you can avoid situations like this.  The best way to find one is through the National Association of Personal Financial Advisors (  While you aren't guaranteed to find a great advisor (you still need to vet them further), at least you will know that advisor is not incented by selling you products (NAPFA members cannot accept commissions or kickbacks in any form).

Full disclosure- Greenspring is a member of NAPFA.

More Conflicts At Big Brokerage Firms

Did you ever wonder how a financial advisor makes their investment recommendations?  There are thousands of mutual funds on the market today.  How does he/she pick one over the other?  If your advisor works for a big brokerage firm like Morgan Stanley or Merrill Lynch, some of the decision making is taken out of his/her hands.  There is a little known practice that happens in which funds pay for "shelf space".  In order for a fund to be offered on a large brokerage firm's platform, they must pay hefty fees.  Some fund companies are happy to do this in order to gain distribution, while others refuse.  Here is Jason Zweig of the WSJ discussing some of the nuances:

The financial industry calls these fees “payment for shelf space,” and they can add up. At Edward Jones, revenue-sharing fees from fund companies topped $153 million in 2014, or just under 20% of the the St. Louis-based brokerage and advisory firm’s total net income that year.

At Merrill Lynch, fund companies pay up to 0.25% of sales and 0.10% of assets annually for “marketing services and support,” according to a 2015 disclosure. Morgan Stanley collects $750,000 per year from each of 28 fund companies it has designated “global partners” and $350,000 annually from each of another 11 “emerging partners,” according to the firm’s latest available disclosure.

The disclosure statements warn that revenue sharing can be an ethical minefield. Edward Jones says the payments create “an additional financial incentive and financial benefit” to the firm and its advisers. Merrill Lynch points out that funds that don’t enter into such arrangements “are generally not offered to clients.” Morgan Stanley says the firm may “promote and recommend” funds that pay higher revenue sharing.

Do you think there is a conflict here?  You bet.  Let me give you a real life example.  Before I founded Greenspring, I was employed by one of these large institutions.  After doing some of my own research I found a fantastic real estate fund that I thought would make sense to own in client portfolios.  But since this fund company was not willing to pay a portion of their revenue to my firm I was not able to offer it to clients.  As an advisor, when you can't recommend products that are in your client's best interest, there is a conflict.  One other thing you have to realize…the only way for the economics on this type of arrangement to work is by using high fee funds.  If you are offering your products on Merrill Lynch's platform, you can't pay Merrill Lynch 0.35% in the first year if your expense ratio is 0.2%.  Why do you think you can't buy a Vanguard mutual fund at these firms (which by the way is probably one of the best fund companies on the planet)?  Because Vanguard only charges 0.1%-0.2% for many of their fund expenses.  They don't charge enough to share fees.

Many investors think that a fee-based relationship is the same whether it is at Merrill Lynch, Morgan Stanley or an independent firm.  It's not.  While you may be paying similar fees to your advisor in each of these scenarios, what you don't see is that independent firms don't charge for shelf space, and therefore are free to recommend any product they think is best for their client.  The big firms only recommend funds that have paid them for shelf space.  This can have a major impact on fund selection and portfolio performance.

Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.