Brokerage firms do not function this way. When you go to Merrill Lynch, Morgan Stanley or UBS (or any other brokerage firm), you are dealing with a broker who gets paid to sell investment products. Yes, they sometimes act as investment advisors, but generally clients don't know what hat their broker is wearing. And that can cause some problems.
Individuals who go to these firms for investment advice need to understand that they are not the clients the firm values most. These firms make most of their profits from investment banking. Investment banking involves helping companies and governments raise money through the issuance of stocks, bonds and other financial instruments. Individuals who are clients of brokerage firms are the sales channel through which these products are sold. Interestingly, these firms have a fiduciary duty to their investment banking clients but not to the individuals who buy these financial instruments.
The point is that these firms know where their bread is buttered and have a greater interest in keeping the investment banking clients happy because that is where they make the majority of their profits.
The latest news about the auction rate securities market provides proof of how brokerage firms favor large investment banking clients over less profitable individual clients:
UBS Financial Services Inc. knew as early as December that a segment of the municipal bond business was in trouble, but the Wall Street firm kept selling the investments to some clients without warning them of the risk, according to documents reviewed by the Globe.
By February, the $330 billion auction-rate securities market had collapsed, locking out the nonprofits and municipalities that had used the market for years to issue inexpensive debt, as well as the investors who had purchased it. UBS brokers have said they were as surprised as anyone about the market's shutdown.
But on the other side of the firm, UBS was advising some large investment banking clients of the looming problems at least three months before all trading stopped, according to a letter to investors by one of those clients, a New Hampshire bond issuer.
So the investment banking side of UBS warned issuers about the possibility of failed auctions while the brokerage side that caters to individuals was selling the same securities to individuals and telling them they were safe, cash equivalent investments. The article linked above highlights an individual investor with $650,000 stuck in auction rate securities issued by a UBS investment banking client. The real client of UBS was the issuer, not the individual. To UBS, and the other brokerage firms, the individual investor is just a sales channel for the products they create for investment banking clients.
To get truly unbiased advice, investors have only one choice. Fee only planners (be sure they are really fee only) and RIAs are working for you. Brokerage firms are not. It's that simple.