The title “financial advisor” can be confusing because just about anyone in the financial services industry can use it. There are no rules that restrict this role to particular types of professionals. However, “real” advisors do have particular characteristics you should watch for: They are RIAs (Registered Investment Advisors) or Investment Advisor Representatives (IARS), they act in a fiduciary capacity when providing investment advice or services, and they are compensated with fees. Also see financial advisor ethics on the Investment.org
There is a large number of investors who believe anything their advisors tell them because they have personal relationships. They like their advisors and they inherently trust people they like. And, investors do not question the advice of people they trust. This is a license to steal for unscrupulous advisors who take advantage of investors who trust them to maximize their own incomes.
It is unfortunate, but a lot of investors have trouble believing people they like will take advantage of them to make more money. Ask yourself this question. Do you really believe your current advisor would voluntarily provide information that would get him fired – for example, bad performance, high expenses, excessive risk, or conflicts of interest? The answer is absolutely not! His income would stop and you might file a complaint with one of the regulatory agencies. If the abuse was bad enough, it could cost the advisor his job. It is much safer and rewarding for the advisor to withhold this information from you. Continue reading →
If your answer is yes, you may be in serious financial trouble and not know it. Read on if your answer is no. You are about to learn some nasty tricks of the trade that have been engineered by Wall Street.
A high percentage of investors believe financial advisors have to tell the truth because they work in a regulated industry. It’s true, they are supposed to tell the truth, but there is no way the regulatory agencies (FINRA, SEC, State Securities and Insurance Commissioners) can protect you from unscrupulous advisors. Continue reading →
How about this for a start? Financial advisors may be money managers, but money managers may not be financial advisors. Or, does this make it even more confusing. The solution is to develop clear definitions of the professionals’ various roles so you select the right advisor based on the services that they provide.
Money managers have two distinguishing characteristics that describe what they do:
They invest your assets in the securities markets. Therefore, Separate Account Managers, mutual funds, and hedge funds are different types of money managers
They provide the same service to multiple clients. Their services have very little variation by client. So when you invest in a mutual fund, you get the same service and results as other people in the fund Continue reading →
Most investors are confused by the roles of financial planners and financial advisors. In fact, over 75% of investors say they do not know how they differ. They believe these are two roles that provide the same services. Not exactly!
One source of the confusion is anyone can call themselves financial planners whether it is true or not. There is no regulation that prevents this deceptive sales practice. Not too long ago, 70% of planners were actually insurance agents who called themselves financial planners for two reasons. First, the role of the planner was more acceptable to people than the role of agent so there was less sales resistance. Second, they used the financial plan to sell large amounts of insurance products (annuities, life insurance, long term care). Again resistance was lower because the clients’ financial plans recommended the products not the agent/planner. Continue reading →
Stockbrokers, who sell investment products for commissions, tell investors they are financial advisors because it reduces sales resistance and improves their odds of making sales. They are breaking an industry regulation when they call themselves advisors, but the claim is verbal in a sales pitch. Investors have no record of what was said to them so the sales reps get away with it.
It is easy to recognize stockbrokers and other types of sales reps. They have two distinguishing characteristics that are difficult to hide. You just have to know the right questions to ask. First, “What licenses and registrations do you hold?” And second, “How are you compensated for your advice and services?” The advisor is a sales rep if the answer to the first question is a Series 6 or 7 license and the answer to the second question is commissions. Continue reading →
Savvy investors do not buy investment products from sales representatives (reps). They select “real” financial advisors who have the specialized expertise and services they need to help them achieve their financial goals. This is a far cry from reps who want to sell mutual fund products that pay 5% commissions. Regardless of what reps say in their sales pitches, astute investors should know reps, who are paid at the time of the sale, have no economic incentive to help them achieve their financial goals.
If you are a savvy investor you should pay fees to a financial advisor for his knowledge, advice, and services. If you become dissatisfied with the advisor’s results you can terminate the relationship and the advisor’s compensation stops. This is a powerful incentive that motivates advisors to help you achieve your goals. Continue reading →
There are actually two questions in the heading of this blog post. Who are the financial advisors and what does it mean to be independent?
Just about everyone who sells financial advice, services, and products refers to themselves as advisors. However, from a licensing and registration point of view advisors have some very specific characteristics that distinguish them from other types of professionals.
A financial advisor is registered one of two ways. They may be Registered Investment Advisors (RIAs), which means they own their own firms. Or, they are Investment Advisor Representatives (IARs), which means they are registered with an RIA. This is a critical distinction because only RIAs and IARs are permitted to provide financial advice and ongoing services for fees. So if you believe, the way I do, that fees are the appropriate way to pay for financial advice, then you should select an RIA or an IAR. Continue reading →
Individual investors are notorious for being emotionally involved with their money. This may be why money is one of the leading causes of divorce in this country. The two primary emotions are greed and fear.
First, there is greed, which is based on how much money you will make if you are right. Greed causes investors to take substantial amounts of risk in the hope of capturing higher returns. Greed even causes people to invest in scams because they promise exceptional returns. How many scams have you read about that touted 40% to 70% returns? Continue reading →
My own experience will illustrate the problem. I attended an investor meeting with the head of our Chicago office. We both thought the meeting went extremely well. The investor asked thoughtful questions and we had good answers. We also had a very competitive track record and charged reasonable expenses for our knowledge, advice, and services.
The Chicago manager and I were both a little shocked when we were told the investor selected a money manager in Boston. He said the firm employed five Harvard MBAs, who were also CFAs, and their track record was 10% per year higher than ours. We had never heard of this money management firm before, but wrote it off as a loss and moved on.
About one year later, there was an article in the Wall Street Journal saying the SEC had shut this firm down. The owner of the company had made everything up: The staff, the credentials of the staff, the track record, and a glossy marketing brochure that even had photos of key staff surrounded by a lot of computers. Interestingly, the fake firm was on the approved lists of several wirehouses due to its enviable track record and exceptional staff. In two years, he had amassed $330 million of assets under management working out of a spare bedroom in his home. Continue reading →
Financial advisors are responsible for helping investors achieve their financial goals. They help them develop financial plans and investment strategy. They help them determine allocations to the various asset classes. They help them select money managers. And, they provide performance reports that document monthly or quarterly investment results.
What if advisors do not provide these services? There is a 95% probability the “advisor” is really a “sales representative” who is paid commissions to sell investment and insurance products. Their responsibilities stop when investors sign their contracts. The advisors’ next steps are collecting their commissions and moving on to the next sale. These advisors are clearly not accountable for results because they have already been paid and do not provide ongoing services. This is the number one reason why investors should not rely on sales reps to help them invest their assets – no accountability. Continue reading →