More financial advisors are leaving big Wall Street wirehouses to go to smaller firms or start their own firms. They have a number of reasons for making the change, but most say they are fed-up with continuous headlines that document company scams and deceptive sales practices. They can’t change their firms’ business practices so their only choice is to change firms.
All advisors claim they change firms so they can provide higher quality services to their clients with no conflicts of interest. This is true half of the time. The other major reason is the advisors may make more money at the new firm, a lot more money. Continue reading →
When it comes to their money investors must thoroughly investigate the adviser’s credentials; whether the adviser is held to a fiduciary standard (not just a suitability standard); and whether there are any material conflicts of interest that would exist with the investor/adviser relationship.
There are many investment credentials out there and sorting through them can be overwhelming. The letters after an adviser’s name are an important gauge of how much training he has actually received. Some certifications require very little study or work experience and can be attained rather easily while other designations require far more rigorous study and examinations to earn. It is important that investors get to know the letters behind the name of the person they are about to hire because the holders of more prestigious designations have demonstrated a commitment to become better at their craft and have shown a strong desire to maintain a higher level of integrity.
Just as important to understand is that not all investment professionals are held to a fiduciary standard. Be very wary of a broker who calls himself an investment adviser as a broker is generally not held to a fiduciary obligation (only a suitability standard which is extremely subjective). A fiduciary standard is a legal duty that requires advisers to put a client’s interests ahead of their own at all times and to fully disclose their conflicts of interest.
A conflict of interest exists when an adviser’s interest competes with his duty to his clients. Such a conflict is material when it has the potential to dramatically affect the result. The fact that a broker receives commissions if a client implements a particular recommendation is a material conflict of interest that should be weighed considerably before an investor does business with any broker.
Many investors are confused about the term investment advice and the different types of professionals who can provide it. Most investors do not understand the differences between investment adviser representatives or brokers calling themselves financial advisers; and the standard of care they think they are receiving from each.
Fee only investment advisers are legally obligated to act in the best interests of their client (i.e. act as a fiduciary). In contrast, brokers who call themselves financial advisers facilitate securities purchases and sales for their clients, usually for a commission, and are primarily governed by FINRA, which (and this is key) requires that investment recommendations they make to their clients be suitable for that particular client. In broker/client relationship, filled with all sorts of conflicts of interests, suitability is an extremely blurry standard at best.
A report by The RAND Institute for Civil Justice in 2008 found that 63% of investors believe registered representatives are required to act in the best interests of their client (they aren’t), and 70% believe that registered representatives must disclose any conflicts of interest (generally, they don’t)… [TD Ameritrade White Paper].
Due to the influence of special interest, Congress has not taken the initiative to clear up the confusion. Unfortunately for investors, confusing the two can have entirely unintended consequences. A clear line needs to be drawn between them so investors can make more informed decisions. There needs to be a clear distinction between who is a fiduciary and who is a salesperson. Anything less is irresponsible and unacceptable.
On the surface, a broker and a fee-based adviser look exactly the same to most investors. In the investors mind the distance between the two is quite narrow, but in reality the structuring of their incentives are vastly different with significant implications. In a former post, “Ripped Off: Who is Paying Your Financial Advisor”, someone took issue with what I believed to be a fair assessment of industry practices. I appreciate all comments, agreeable or disagreeable, but I also realize sometimes the truth hurts.
How is your adviser being paid? To find out just ask some simple questions: Are you a fee-based or are you a commission-based adviser? Are you paid by me, the investor, or are you paid commissions by the mutual fund and annuity companies?
A fee-based arrangement does not guarantee profits or protection against losses, but the fee-based arrangement does a much better job of aligning both the investor’s and adviser’s goals. With the incentive to grow and protect the client’s assets, the fee-based arrangement places the adviser and client on the same side of the table.
This arrangement considerably reduces conflicts of interest; such as, “Is my adviser recommending this product to me because he will receive a larger commission on this product versus another equally suitable one that costs less?” In other words, there are no hidden agendas.