According to Cerulli Associates between 2007 and 2010, assets under management in the financial adviser industry as a whole rose to $11.2 trillion from just under $11 trillion. During the same period client assets at the wirehouses, Bank of America/Merrill Lynch, Morgan Stanley Smith Barney, UBS, and Wells Fargo Advisors – dropped to $4.8 trillion from $5.5 trillion.
Are investors finally fed-up with Wall Street antics or are their advisors leaving to go independent and they leaving with them? The answer is both. Thousands of investors have fired Wall Street brokers and selected independent advisors to replace them. Thousands more have followed Wall Street brokers who decided to go independent.
This data are supported by a 2011 Investor Watchdog survey that showed investors put more importance on their relationships with advisors than their advisors’ firms.
Is your advisor unexpectedly changing his business model or practices? Do you suddenly find yourself in front of your advisor with him telling you all about the virtues of his new fee-based business? Explaining to you the merits of why his managing your portfolio for a fee is beneficial to you? Do you wonder why this is all the sudden happening right now?
The SEC is proposing a new regulatory framework that would require improved disclosure to investors. Part of the proposal includes the replacement of 12b-1 fees. You might be asking, what are 12b-1 fees? These are fees that are charged by most mutual fund companies and are paid to financial professionals. The mutual fund industry likes to call them marketing fees when really what they are is a commission paid to a financial advisor who sells a company’s mutual funds to his clients.
The SEC stated that 12b-1 fees totaled $9.5 billion in 2009 and in the words of SEC Chairman Mary L. Schapiro, “Despite paying billions of dollars, many investors do not understand what 12b-1 fees are, and it’s likely that some don’t even know that these fees are being deducted from their funds or who they are ultimately compensating. Our proposals would replace rule 12b-1 with new rules designed to enhance clarity, fairness and competition when investors buy mutual funds.”
Knowing what regulation is potentially coming to pass; many slippery types are now getting in front of this and approaching their clients explaining all the benefits of their new fee-based relationship and trying to convince their clients that the “old” way was not necessarily the wrong way but this new way is better. All you should be asking yourself is why didn’t my advisor practice this way of doing business throughout our relationship?
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.
Is your adviser charging you both a commission and a fee? This practice of receiving compensation from two sources is not necessarily illegal but is a question of ethics and a grave one at that.
Recently this came to my attention when I sat down with a prospective client who was with an adviser at a large well-known bank (I will save that investment company the embarrassment). The adviser has been collecting a fee on the investor’s portfolio and receiving commissions from the mutual funds held within the portfolio. Apparently, this is common practice at this company. The adviser shouldn’t be allowed to “double-dip” by collecting both commissions from the mutual funds and fees from your overall portfolio.
One of the most important questions to ask your adviser is… “How do you get paid?” This is a question that some advisers would rather avoid. Tell them you want to know each and every source of compensation. If he says something that doesn’t make sense, keep asking questions; this is your money. If you feel you are not getting a straight answer, it’s probably time to move on.
Having suffered devastating losses, witnessed the Bernie Madoff scandal, and been forced to revise retirement plans for the worse, the greatest question for weary investors today is: Whom can you trust? Consider one of the most trusted groups of professionals, doctors; they must go through rigorous schooling and training and take the Hippocratic Oath in order to practice medicine. There are no parallel standards or code of ethics for financial advisers.
One of the most serious concerns for investors is the large number of ordinary people holding themselves out as financial advisers without having met any rigorous competency standards or embraced a code of ethics; in other words, providing no proof that they are qualified practitioners devoted to a standard of professional conduct. High quality investment advisers hold certifications that prove they are experts in their profession.
Selecting an adviser lacking legitimate credentials based on salesmanship or personality alone can be a major financial risk. This is tantamount to letting a used-car salesman perform your open-heart surgery because you like his personality. It is incumbent upon the consumer to ensure the person handling their money is properly accredited and has the necessary experience to deliver and perform high-quality services.
Remember, not all investment certifications are close to being equal. Beware of phony certifications that claim to represent specialized knowledge. Questionable certifications can be attained through the redemption of a few cereal box-tops and a small fee. Brokers who buy these fictitious designations are ethically challenged and disreputable. The CFA, CPA, and CFP are highly respected credentials for investment professionals held in high esteem. Perhaps the most rigorous to attain is the CFA designation. The CFA is respected by regulators and demanded by private investors.
Summarized in a recent FA News (May 08, 2009) article, FINRA: Broker Deceived 64-Year-Old Nun, a financial adviser affiliated with a well-recognized financial institution swindled a 64-year-old nun, an elderly couple, and a retired widow out of huge sums of money. Besides being a truly despicable piece, it goes to show you that just because (or especially because) an adviser is affiliated with a household name, investors should not assume that he will be honest and act with ethical integrity.
This disgraceful act was perpetrated at a large, well-known financial institution. This type of behavior generates many serious questions: Where were the checks and balances? Where were the internal controls to guard against such an act? How can investors protect themselves from such deceptive behavior? Why isn’t the offending broker in jail?