In a recent article published in AARP’s magazine, Allan Roth provides excellent insight into the world of financial professionals and the conflicts of interest that test their ethics. Advisors fight daily battles that challenge them to do what is best for investors versus what is best for themselves and their firms.
Allan is a practicing financial professional in Colorado. You can visit his website at: DareToBeDull.com.
Last night 60 Minutes ran a story that documented the greed of Lehman Brothers’ executives that bankrupted the company and the corrupt business practices the executives used to hide the problem from regulators and investors. Investors lost hundreds of billions of dollars. Why aren’t these executives in jail?
I have a bridge I would like to sell you if you think Lehman Brothers was the only greedy, corrupt firm on Wall Street!
An advisor is a Registered Investment Advisor or an Investment Advisor Representatives. These are the registrations that permit them to provide financial advice and ongoing services for fees.
As you might imagine the only method of compensation for fee-only advisors is fees. These professionals do not receive any form of commissions from investment or insurance companies. Continue reading
Bad advice is tough to recognize because it is designed to look like good advice.
1. The products produce inferior performance compared to other products that invest in the same asset classes.
2. Inferior performance is coupled with excessive risk compared to similar products.
3. The product charges higher fees than other products with similar objectives and risk exposure.
4. Financial advisors want you to make investment decisions based on relationships and sales claims.
5. There are no easy to read and understand disclosures for performance, risk, expense, and investment principles.
One key difference is bad financial advice is legal. Investment scams, such as Ponzi schemes, are illegal. There is no way regulatory agencies can mandate high quality financial advice that is always in the best interests of investors. In fact, regulations that impact the quality of financial advice are non-existent.
Bad advice means your assets under-perform compared to good advice that produces higher returns. If you are unfortunate enough to invest in scam, there is a high probability your assets will disappear.
Bad advice is impacted by the risk associated with investing in the securities markets. Most scams do not invest assets they steal assets. Therefore, your risk is not the securities markets, it is the products and the company that produced and sold the products to you.
Advisors who are financial fiduciaries are allowed to provide financial advice for fees.
Non-fiduciary advisors are limited to selling investment products for commissions. They are not allowed to charge fees for their services.
Do you really want a sales rep who is paid commissions investing your assets? Of course not and Wall Street knows it. Its solution is to blur distinctions between the two types of advisors and hope you won’t take the time to learn the differences.
If you want a fiduciary advisor select one whose only method of compensation is fees.
Wall Street is a marketing powerhouse. It knows how to manipulate investors for its own benefit. No matter how smart and sophisticated you think you are, all of those PhDs on Wall Street are smarter.
One popular Wall Street tactic is to blur differences to benefit itself. For example, can you tell me the difference between investment “advice” and investment “recommendations”? Would you believe there is a huge difference?
Investment advisors who are Registered Investment Advisors or Investment Advisor Representatives can provide financial “advice”. Stockbrokers, who hold Series 6 and 7 licenses, are not allowed to provide investment advice. They are limited to making investment “recommendations”.
If you want a real advisor you have to select a professional who is a Registered Investment Advisor or an Investment Advisor Representative.
Advisors and firms want to be held to low ethical standards to reduce their liability for their quality of their advice and services.
It is much easier for advisors to defend themselves when they are accused of making unsuitable investments. The word itself is vague and subject to interpretation.
A fiduciary standard creates a lot of exposure for less ethical firms that put their need for profit ahead of investors’ need to achieve financial goals. Fiduciaries have to put client interests ahead of their own. This is much stricter than suitability therefore it creates additional liability for advisors and their firms.
Think about it. An advisor wants to invest your retirement assets for you, but the advisor does not want a requirement to put your interests first. There are only two other “interests” – the advisor or the advisor’s firm.
Make sure your advisor is a fiduciary.
Fiduciaries are advisors who hold registrations that permit them to provide financial advice and services for fees.
There is no guarantee you will receive competent financial advice from a fiduciary. However, the key to this standard is ethics, not competence.
Fiduciaries are required by law to put your financial interests ahead of their own. That means, when they recommend an investment, it should benefit you more than it does them.
Make sure your advisor acknowledges he or she is a fiduciary in writing. You have better odds of getting financial advice you can trust.