Wirehouse accounts don’t match client goals

SAN FRANCISCO — In a huge survey of its clientele, Schwab Institutional documented what financial advisers have been screaming about for years.
Accounts that clients transfer from wirehouse brokers have investment guideline statements that consistently are misaligned with client financial goals, according to advisers who participated in the San Francisco-based broker’s survey.
Fully 75% of these accounts arrive with poorly structured portfolios, according to 1,400 registered investment advisers — managing a combined $347 billion in assets — who responded to the Advisor Outlook Study.
“We’ve always known it,” said Stephen Winks, principal with SrConsultant.com of Richmond, Va. “It’s the first time anyone created any empirical evidence” of the lack of financial planning executed by stockbrokers.
All advisers interviewed said that their only doubt about the study was that as much as 25% of transferred accounts are considered by RIAs to have successful alignment of goals.
But some wirehouse brokers do an excellent job for their clients, according to John B. Sullivan, president of Portland (Maine) Global Advisors LLC, which manages $190 million.
It’s just that there are few good ones, and the remainder of stockbrokers seem to fall into two traps, he added.
Many brokers have 500 accounts or more, making customization across the client base nearly impossible.
“There’s 365 days in a year, and things fall between the cracks,” Mr. Sullivan said.
This exacts a price, said Norman Boone, president of Mosaic Financial Partners Inc., which manages $350 million from San Francisco.
“It makes me sick to my stomach, and by the time they get to me, it’s usually too late,” he said. “It’s not that the clients have been abused. It’s just such a lost opportunity, and they’ll have to work another five or 10 years.”
Indeed, many stockbrokers buy stock reactively as cash arrives in the account, Mr. Sullivan said.
“Sometimes it’s not a systematic thing, so in 25 years, you’ve got 32 different mutual funds, and it [creates] Frankenportfolio,” he said.
“‘Frankenportfolio’ is a brilliant articulation,” Mr. Winks said. “If this were a profession — and it’s not — this [poor management of client assets] would be malpractice or malfeasance. A profession presumes accountability.”
“As a trade association, we can neither comment on the specifics of a report we have not seen, nor are we in a position to debate one member’s survey in which they attempt to establish competitive advantage against other member firms,” said Jeannie Bunton, a spokeswoman for the Securities Industry and Financial Markets Association of New York and Washington.
“But it is important to note that we surveyed investors annually from 1995-2004 and found each year, between 85% and 96% of investors were satisfied with their brokers.”
But the difficult task is to make clients realize what poor advice they are receiving, said David Bromelcamp, president of Allodium Investment Consultants LLC, a Minneapolis firm that manages $150 million.
“Clients change advisers when they feel their adviser isn’t listening to them,” he said. “And if portfolios are not set according to goals in the eyes of the client, the client gets frustrated.”
Schwab’s purpose in creating this survey — which will be updated every six months — is to make clients more aware that their stockbrokers are not attuned to their clients’ needs.
“It’s part of our category awareness efforts,” said Alison Wertheim, spokeswoman for Schwab. “We’re shining a bright light on these results.”
But the light should shine also on the plethora of self-directed investors out there who mismanage their own portfolios, according to Mr. Boone.
“A lot of people make decisions themselves,” he said. “They have a [retail] Schwab account, a little T. Rowe Price here and a little American Funds there.
“The most frequent mistake we see” is to have no overarching plan to guide investment decisions.