Investor Crossword Puzzles: Conflicts of Interest

Investors are not the only individuals that stand to gain from investment transactions. Brokers, Investment Advisers, and Member Firms all have some sort of stake in the investment transactions. Most commonly, brokers and investment advisors have a financial incentive in buying and selling funds through commissions. Commissions are the fees paid to a broker by an investor for executing a trade. Additionally, brokers may earn money through mark-ups. Mark-ups are the difference between the market price of a security and the price at which a broker-dealer buys or sells that security directly from or to a customer.

There are also different types of accounts which help the brokers generate revenue. One of these accounts is known as a wrap account. The fee is typically calculated based on the total market value of the account, and it includes the management, brokerage, and administrative expenses for the account.

Another account which helps the broker generate revenue is known as a margin account. In these accounts, the broker lends the investor part of the money, which allows the investor more income potential on each of his investments. However, if the investment does not perform, the investor might be on the hook for the broker’s money too!

Finally, a common and precarious conflict of interest may come from proprietary funds. These can include house-brand mutual funds created when the brokerage firm that distributes the fund also acts as investment adviser for the fund, including both the management and distribution of the fund. When a firm sells proprietary funds it is difficult to ascertain who exactly the broker is looking out for. The more they sell of the house-brand fund, the more impressed their supervisors may be. However, this may come at the price of unsuitable recommendations for the investor.

Never be afraid to discuss these conflicts with your broker or investment adviser.

4. A type of brokerage account in which the investor borrows cash from the broker (2 Words)
5. An investment account with a “wrapped” fee (2 Words)

1. Funds which the broker might want to sell more of, since they are run by the firm. (2 Words)
2. These are differences between the market price of a security and the price at which a broker- dealer buys or sells that security directly from or to a customer.
3. The fees paid to a broker to execute a trade, based on certain factors regarding the trade itself.