Most customers of brokerage firms believe their financial advisor is working in their (the client’s) best interest when the advisor recommends investments. In reality, brokerage firm advisors work under a suitability standard, a standard which doesn’t require that the advisor put the customer’s interest before that of the advisor. Many brokerage firm advisors recommend investments that pay them higher commissions when a better and less expensive solution is available!
The clients of national brokerage firm Edward Jones face another interesting conundrum. Jones is the nation’s largest brokerage firm as measured by their nearly 19,000 financial advisors. Not only do Edward Jones advisors not work as a fiduciary, the company seems to have a preference in their product offering towards funds that share revenue.
Edward Jones brokers typically work from a list of “preferred partner funds” in structuring investment portfolios for clients. As it turns out, most of the funds on the “preferred partner” list also share revenue with Edward Jones. For example, in 2020 American Funds paid Edward Jones nearly $100 million in revenue sharing payments. It comes as no surprise that many of American Funds mutual funds are on the preferred partner list. Here’s a link to Edward Jones’ revenue sharing disclosure if you want more information.
Edward Jones isn’t the only brokerage firm to collect fees through revenue sharing, but it represents a significant percentage of profit for the firm. Jones received nearly $250 million in revenue sharing payments in 2020, which represented about 20% of their reported profits for the year.
It stands to reason that (1) if your advisor isn’t legally required to recommend the best solution for you and (2) certain funds pay the advisor more for using them - perhaps customers might want to reconsider their advisory relationship.