Industry Regulations

There are no industry regulations that limit who can call themselves financial planners. A brand new sales rep may adopt the title to facilitate the sales of financial products. There are no tests to make this claim more valid and there are no licenses for financial planners. If you are asking why, it is because Wall Street firms also benefit from this deceptive sales tactic. The firms make more money when they make it easy for their reps to sell investment products and services. And make no mistake.  Wall Street has tremendous influence over the regulations that govern the industry. 

Financial Planning Expertise 

You may believe financial planners possess exceptional expertise that will help you achieve your financial goals. That may or may not be true. At the low end of the scale are reps masquerading as financial planners who use questionnaires to ask you a standardized series of questions about your assets, goals, concerns, risk tolerance, and requirements. Then the questionnaire is input into software that spits out your “custom” financial plan in a matter of seconds. The “financial planner” may spend an hour or two administering the questionnaire, a relative junior person inputs the data, and the “financial planner” presents the plan and completes the paperwork for the sale of investment and insurance products that are recommended by the plan.

Representatives need very little planning knowledge to execute this sales strategy. In fact, all they need is a little more knowledge than you possess to call themselves financial planners and experts in their field. They know you do not question the advice of experts, even if they provide no proof they are experts.

Fake Credentials 

Be aware that financial representatives know most investors associate credentials with levels of expertise. They know you assume they did a lot of work acquiring credentials the same way future CPAs did a lot of work. It takes hundreds of hours of study to pass the CPA exams. It may take zero hours of study to obtain a fake planning certification. That is because advisors can buy fake credentials and use them to convince you they are experts in their fields. They get away with this deceptive sales practice because there is no easy way for investors to check the validity of credentials.

What is a Directory?

Most directories are listings of professionals (Investment Advisors, Attorneys, CPAs, and Doctors) that are based on their locations and the types of services they provide. The listings are almost always paid advertisements that provide a limited amount of information about the professionals, but usually have links to more comprehensive sources of data. Most directories do not disclose the criteria that limits who can be listed. In fact, most directories accept anyone who is willing to pay them, just like the Yellow Pages.

What is Due Diligence?

Due diligence is a process that you use to vet financial planners and investment advisors. The vetting process includes four categories of information: Credentials, Ethics, Business Practices, and Wealth Management Services. The process sounds easy enough until you realize there are thousands of variations and you do not know if you are being told the truth. In fact, less ethical advisors use Omission, Misrepresentation, and Exaggeration to deceive investors into buying what they are selling. It pays to validate claims that are made by advisors so you know you are getting complete and accurate information.

Why Are Directories Dangerous? 

Directories, in particular those that are published by magazines, are particularly dangerous for two reasons. First, you have no idea what criteria they used to qualify financial advisors for listings in the Directory. Second, the publishers may have conflicts of interest that are not fully disclosed to you. For example, the investment advisor buys advertising or other services from the publisher. You end-up selecting a weak advisor who happened to appear on a list that said it represented the best advisors in America.

Why Use the Internet?

The Internet is a powerful tool that can help you avoid major mistakes. You maximize its power when you use it to perform online research on investment advisors and other types of professionals. Why is it so powerful? Because, unlike other processes, you can find and research advisors while protecting your identity until you are ready to interview investment advisors, financial planners, and other professionals. For example, you can review their professional profiles on the Paladin Registry website, you can visit the professionals’ websites, and you can Google search their names and their firms’ names. You know a lot about the advisors you research, but the advisors don’t even know you exist. That is real power.

Why Use PaladinRegistry.com?

Paladin has been evaluating investment advisors and financial planners since 2000. Paladin knows the right questions to ask and it knows good answers from bad ones. Plus, advisors have to score 90 points or higher to be listed. The scoring criteria focus on information that really matters: Education, experience, certifications, compliance records, method of compensation and other criteria. In addition, the Registry documents advisor responses so you have a permanent record for your files. The bottom-line, the online financial advisor directory at PaladinRegistry.com helps you select the advisor with the best qualifications, not the best sales pitch.

Disclosure: the same company owns Investor Watchdog and Paladin Registry.

A great New Year’s resolution for Wall Street would be to come clean with you and the millions of other investors who depend on its competence and ethics. For the first time, financial advisors and their firms would voluntarily provide the facts you need to make informed decisions. But, don’t hold you breath. Wall Street, like the tobacco and pharmaceutical industries, cannot afford to adopt business practices that include full disclosure.

What is Wall Street? 

The words Wall Street are usually reserved for major companies like Merrill Lynch and Morgan Stanley. But, in a broad sense it is any firm that makes money providing investment advice, services, and products to individual and institutional investors.

Hypocrisy

On the one hand, Wall Street advertisements claim you can trust its companies and advisors with your assets. On the other hand, it spends hundreds of millions of dollars per year fighting any form of disclosure that would level the playing field for you. What do you trust – advertisements or actions? Unfortunately, most investors believe advertisements because actions take place behind closed doors.

Remember when big tobacco companies advertised their products as safe? It did not seem to matter that 400,000 Americans per year died from smoking related illnesses. Tobacco companies spent billions of dollars fighting regulations that required increased disclosure for smoking’s health risks. Wall Street firms are in the same boat. Increased disclosure reduces revenues.

Mandatory Disclosure

In the absence of mandatory disclosure requirements Wall Street has made it your responsibility to get the facts, knowing full well you have no process for obtaining facts. They have transferred these major sources of financial risk to you. Which advisor do you select? How do you invest your assets? What are the advice and services costing you? How much risk are you exposed to? Will you achieve your financial goals?

How Are You Better Off?

You make better decisions. Instead of relying on sales pitches and sales claims to make decisions, you have factual information that reduces your risk and helps you achieve your financial goals.

How does a level playing field damage Wall Street firms and advisors? Let’s say you interviewed three advisors. Each advisor submitted a written proposal to you describing their investment strategy for your assets and the associated expenses. You have information that will help you select the best advisor for the right reasons.

This hundred year-old relationship changed when trading commissions were deregulated. The new regulation created discount brokers and severe price competition between established firms. Stockbrokers could no longer make the money they were used to so they had to change their role. They became salesmen whose primary role was to sell investment and insurance products (mutual funds, annuities) to their clients. They were and still are compensated with commissions that are based on the amount of products they sell.

35 years later, investors are still being impacted by deregulation. Many of the people who claim to be investment advisors are really sales representatives who are paid commissions to sell them products. And, thanks to slick marketing, investors do not know the critical differences between reps and real financial advisors.

For example, investors rarely know reps and advisors are held to very different ethical standards. Reps adhere to a lower “suitability standard” that is vague and difficult to enforce. Financial advisors are held to a much higher financial fiduciary standard, which is not subject to interpretation. They are required to put investor interests ahead of their own interests and the interests of their firm.

Various organizations that are investor-friendly want to apply fiduciary standards to stockbrokers and other types of reps who sell investment products. This would make it much easier for investors to select financial advisors and other types of professionals who want to control or influence the investment of their assets.

However, Wall Street does not want stockbrokers held to higher ethical standards for two reasons. Wall Street firms maximize revenue and profits by doing what is best for themselves and not investors. The result is all of the headlines you have seen when firms are caught cheating investors. Second, onerous Wall Street business practices that deliberately damage investors would spawn numerous lawsuits that they would lose.

Consequently, Wall Street is spending millions to stop, delay, or water-down the requirements of the regulation so it can do business as usual. Odds are they will win because politicians control the regulators and Wall Street owns the politicians’ votes because it provides the money they need to stay in office.

These risks are created by deceptive sales practices that lower quality advisors use to sell investment and insurance products.

1.  Fake Experts

Every financial advisor claims to be an investment expert. They have to or you won’t buy what they are selling. However, 75% of the time advisors are not real experts. In fact, they are not even real advisors. They are sales representatives who camouflage their real roles to lower your resistance and improve their sales results.

How do you identify real advisors? They are Registered Investment Advisors or Investment Advisor Representatives. They are acknowledged fiduciaries who hold positions of trust and they are compensated with fees like other professionals. Fake advisors hold Series 6 and 7 sales licenses. They are paid commissions to sell you investment and insurance products.

Make sure your advisor is a RIA or IAR, an acknowledged fiduciary, and is compensated with fees for his advice and ongoing services.

2. Trustworthy Experts 

Expertise is one area of concern. Another is trustworthiness. Again, advisors claim to be trustworthy because they know this is what you want to hear. You may have noticed they do not provide any proof. They get away with this claim because they know you will not take the time to check their compliance records.

If the advisor has a history of providing trustworthy advice he should have a clean compliance record at FINRA and SEC. Ethical advisors, with nothing to hide, will provide their CRD numbers making it easy to validate their claims at FINRA (www.FINRA.org / BrokerCheck) if they have securities licenses or at the SEC (www.SEC.gov) if they are Registered Investment Advisors.

3. Fake Credentials

Advisors use varying combinations of more than 200 credentials (certifications and designations) after their names when they market themselves as experts. In fact, many advisors believe the more initials that appear after their names the higher the probability you will believe they are experts. The highest I have ever seen for one advisor is 28 letters for nine different certifications and designations.

What do advisors know that you don’t know? They know if you are like most investors, you will not take the time to validate the quality of their credentials.  You will accept the credentials as presented and you may even base your selection decision on the perception the credentials make the advisor a real expert.

35% of the credentials are bought and not earned. You do not want an advisor, who used deceptive sales practices, investing your assets. There is a way to check the validity of advisor credentials in five minutes or less. Go to www.InvestorWatchdog.com / Facts / Advisor Credentials. Input the credential and read the report. If the credential is fake, you should terminate your relationship with the advisor on the basis he is using a deceptive sales practice to gain control of your assets.

4. Withheld Information

Very few advisors provide full transparency for key information that impacts their competence and trustworthiness: Credentials, ethics, business practices, and services. They want you to select them for other reasons, for example personalities and sales claims that have nothing to do with their actual expertise and ethics. It stands to reason, when advisors control information you hear what they want you to hear.

What you don’t know about advisors is one or your biggest financial risks. Therefore, you should never select advisors based on verbal information. You should trust what you see (documentation) and not what you hear (sales pitches and claims).

Ask yourself two questions:

- Do you really believe prospective advisors volunteer information that would damage their sales success? or,
- Do you really believe current advisors volunteer information that would cause you to terminate their services?

Of course you don’t. Those business practices would damage their ability to make money. Instead, they withhold the information and make it your responsibility to uncover it.

5. Performance & Expense Perceptions

If you are like most investors, you do not know the critical difference between good performance and bad performance. There are too many variables that impact the numbers: The stock market, asset allocation, stock selection, etc. And, you may not know the critical differences between excessive expenses and reasonable expenses. Why? Advisors control this information and you hear what they want you to hear.

You should use independent benchmarks to assess performance and expense. Good performance is higher than your performance benchmark and reasonable costs are lower than your expense benchmark.

Gorman is right about the doghouse. According to a Gallup poll last Summer, Americans’ confidence in U.S. banks fell to a record low of 21 percent; about half of what it was in 2007 before the Wall Street initiated crash in 2008. This was supported by Edelman Public Relations survey in January of this year that showed Financial Services & Banking were the least-trusted industries in America.

His doghouse comment had to be a result of the Gallup poll and the Edelman survey. He tried to deflect blame away from Morgan Stanley by mentioning the UBS debacle in London. The second spin tactic was blaming the doghouse on trading scandals that did not directly impact most investors, in particular individual investors with asset amounts under $1 million.

Gorman’s comments and the scandal are not even the real issue and reining in traders who have too much freedom will not be the solution. I will believe the industry is serious about changing its ways the same day it adopts fiduciary standards for brokers and practices full transparency when it sells investment products and services to individual investors.

A fiduciary standard means sales representatives and “real” financial advisors are held to the same ethical standard. By law they have to put investor interests ahead of their own. For what its worth, Wall Street has spent millions fighting this standard – it even lied to congress when it said financial advice was incidental to its sales process. Why is this a lie? Because sales reps claim to be financial advisors to lower resistance when they sell investment products. Why lie? No investor will knowingly turn their assets over to salesmen who were selling used cars six months ago. How do they get away with it? Reps make sure their sales claims are verbal so there is no written record.

Transparency means no information is withheld from investors that would negatively impact the achievement of their goals. For example, disclosures that say sales reps have several investor complaints that resulted in fines or reimbursement. Wall Street knows investors would not buy dog food from this rep or advisor if they had the facts. So Wall Street’s two-part strategy is withholding these types of facts from investors and making them responsible for uncovering problems they don’t know exist.

No wonder trust is at a record low. A big battle is looming. Elisse Walter, the new head of the SEC, will have her hands full fighting Wall Street and the politicians who are paid to protect Wall Street’s financial interests. Individual investors? They have been victims of Wall Street greed since 1975, but now it is out of control.

Investors may spend 30 years accumulating assets for their retirement years. Then they may spend 30 years in retirement. If a Wall Street advisor created a relationship with this type of investor on day one he could generate fees and commissions for the next 60 years.

In year one, the investor opens an account with an initial contribution of money – let’s say $5,000. And, the investor contributes that amount for the next 30 years. Simple math, with no compounding, says the investor will have $150,000 at the end of the 30-year period.

The actual number is much higher. First of all, the assets are invested in the securities markets. During the investor’s younger years the assets are 100% in the stock market. In the later working years and early retirement years the assets are invested in the stock and bond market. And, in the later retirement years the retiree is 100% invested in the bond market. Let’s assume the assets grew at 9% over the life of the relationship.

Every dollar of appreciation increases the amount of fees the investor pays Wall Street for advice and ongoing services. Depreciation will also reduce fees, but markets go up more than they go down or no one would invest in them.

Every year the investor makes new contributions to his retirement fund (the $5,000). Contributions generate additional fees for Wall Street and additional commissions for advisors.

The investments produce dividends and interest, which also increases fees because the income is reinvested in the securities markets.

In summary, there are initial assets, new contributions, market appreciation, and dividends/interest that are driving the market value of the investors’ assets. All of these sources generate bigger fees for Wall Street companies.

Now you know why Wall Street is enamored with retirement assets. They have very long investment horizons (60 years), they grow on their own (contributions, market appreciation, and reinvested income), and investors have lower performance expectations because they are more risk averse.

Every dollar of investment fees is one less dollar you have for reinvestment and your future use. Long-term goals, like secure retirements, can be severely impacted by excessive expenses. 

Financial Planning

Everyone needs a financial plan. It is your roadmap to a secure, comfortable future. There are also college plans, retirement plans, charitable plans, and estate plans. Some planners charge separate fixed or hourly fees for their knowledge and services. Other professionals bundle planning fees with their investment fees so one fee is deducted from your investment accounts. And a third type is compensated with investment and/or insurance commissions for plans that produce product recommendations.

Financial Advisory

Advisors and consultants are compensated with asset-based fees. The fee is a percentage of your assets. For example, a 1% fee on $500,000 of assets produces a $5,000 annual fee. A small percentage of advisors are beginning to charge a fixed fee for their investment knowledge, advice, and services.

Money Management

This type of firm invests your assets in the securities markets. Whereas the advisor recommended the money manager, the money manager recommends portfolios of securities. Most of the time you pay an asset-based fee for their services. Advisors and managers are separate layers of fees.

Custodian

The role of the custodian is to take physical possession of your assets, collect dividends and interest, and process trades. Every month you should receive a brokerage statement from the custodian that lists your holdings, transactions, and income receipts. Custodians, like financial advisors and money managers also charge asset-based fees for their services. Ideally, the custodian is an independent, brand name firm.

Trading 

You may a fixed fee that allows you to execute so many trades per month. Or, you pay a transaction charge for each buy and sell. High turnover financial advisors, money managers, and sales representatives can produce large numbers of transactions.

Sales Commissions 

Advisors are paid with fees. Sales reps are paid with commissions. Most of the time, the reps’ commissions are deducted from your account and paid to the advisors. A 5% commission is a typical amount. The rep is paid for selling you the product; not for helping you achieve your financial goals.

Surrender Charges

Sometimes broker/dealers borrow the money to pay commissions to reps at the time of the sale. Then they charge you higher fees to get back the commissions they paid the reps. You also pay a surrender charge if you want to sell the product in seven years or less. The penalties start at 7% in year one and decline to zero after year seven. The penalty for early withdrawal makes sure the product companies get their commissions back.

Can you afford to wait for politicians to legislate some type of compromise or should you be taking a more proactive approach? 

Personally I don’t like politicians from either party very much. I lump them in with used car salesmen and insurance agents. All three are necessary evils. In particular, I do not like the special interests that keep sleazy politicians in office. They are called special for a reason. Therefore, I would not put a lot of trust in politicians who are more motivated by staying in office than doing what is right for Americans.

We are entering a very tumultuous time for investors. One issue is increased taxes on income and capital gains. Another issue is the impact on the stock market if the Fiscal Cliff triggers another recession. You are particularly vulnerable if you are retired and a significant percentage of your income is fixed and taxable.

During turbulent times like these, there is no substitute for high quality financial advice. Ideally, you are receiving sophisticated advice from three separate specialties: Tax, planning, and investment. All three financial disciplines are being impacted by government action or inaction.

Ideally these three types of professionals provide coordinated, consistent advice that is easy to implement. There is nothing worse than conflicting advice from three experts. Not only did you pay twice for the conflicting advice you have to pay again to determine which advice you are going to follow.

There is a better way. Find a financial services firm that provides all three services and designate one of the providers as your quarterback. It is his responsibility to identify differences and get them resolved. The professionals do not make any recommendations until they are all on the same page.

Watch out for professionals who say they are experts in all three disciplines. They may be experts in one discipline and novices in the other two. Their claim is designed to give them absolute control over your assets.

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. 

At the core of this problem is the trust most investors have placed with their advisors. However, investors can be badly damaged if they trust the wrong advisors. Here is how it works. Advisors want you to like them so you will trust them. Once trust is established they use it to convince you they are investment experts, whether it is true or not. Once you believe they are experts they can sell you any product they want to and you will not question their recommendations. Why? Because you believe they are investment experts. You don’t question advice from your CPA or attorney. Why question your financial advisor. The answer is simple. The tax and legal professions are dominated by an advice culture. The financial advice profession is dominated by a sales culture.

If you are lucky enough to trust an ethical advisor you should get competent advice that puts your financial interests first. If you are unlucky enough to select an unethical advisor you are in trouble and it may be years before you discover the problem.

How do you protect yourself? It is easy to say, but tough to do. You must minimize the impact of the advisor’s personality and sales skills when you make your advisor selection decision. Instead, you have to be objective and focus on the information that really matters: Experience, education, certifications, compliance record, compensation, expenses, services, etc. This information will help you select the advisor with the best qualifications, not the best sales pitch.

An easy way to protect your financial interests is to go to www.InvestorWatchdog.com and use the free tools that obtain the information you need to make the right decision. Watchdog protects you by identifying unethical and incompetent financial advisors.