Misrepresentation does not sound like the onerous business practice that it really is. It is lying for personal gain and it is endemic in the financial services industry.
Financial advisors are supposed to tell the truth. But, what if the truth causes investors to reject their investment recommendations? What if the truth caused you to terminate your relationship with them? They may pay a hefty price for telling the truth. Their alternative is to lie, by providing false information, and hope you don’t find out. This is a pretty safe bet for the advisors because very few investors have a process for gathering and evaluating advisor data. They let the advisors control their selection and investment decision processes because it is easier.
Industry regulations say advisors should not misrepresent information, which is a nice way of saying no lying allowed. But, advisors who make their livings selling investment products largely ignore the regulation. They have virtually zero risk of being caught because all of their information is communicated verbally to you. Consequently, you have no evidence you were lied to and it is your word against the advisors.
Another form of misrepresentation occurs when advisors sell company products. This is a conflict of interest that advisors fail to disclose (omission). They may even tell you the products produce superior returns for reasonable expenses. What if the product produced poor results for high expenses? Do you really believe your advisor would disclose these facts to you? If he did, it would make his advice look pretty bad. Why did he recommend the product in the first place? His manager may have pressured him into selling the product.
One of the most frequently used forms of misrepresentation is fake certifications and designations. We all know about CPA, CFP, and CFA. These are legitimate credentials the advisors earned with hundreds or thousands of hours of study and proctored examinations. But, what about the certifications that advisors purchased for $195? They have no prerequisites, no curriculums, no testing, and no continuing education requirements. Advisors purchase them so they look more knowledgeable than they really are. This is a deceptive sales practice. Use Get the Facts / Certifications on this website to learn more.
Advisors know you are seeking a financial expert who can help you achieve your financial goals. This leads to a second form of misrepresentation when advisors claim to be investment experts whether it is true or not. In fact, all advisors make this claim because it helps them sell investment products. Unfortunately, this ploy works because all they have to know is more than you to make their claim sound true. This claim is a deceptive sales practice. A real expert has the specialized knowledge necessary to deliver competitive results for reasonable risk and expense. People are not experts just because they know a few investment terms that you don’t know. A real expert is a professional who can help you achieve your financial goals.
As usual, another excellent post. If only we could get the message to more people and prevent unnecessary losses due to investment fraud and fiduciary duty breaches.
You might want to consider an article on the fact that DoL and the courts state that modern portfolio theory is the applicable standard for determining prudence under ERISA, yet the DoL does not require that plan participants be given the cornerstone of modern portfolio theory, correlation of returns, as information in manageing their pension plan accounts. Unbelievable!
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Quite a broad brush being painted here. “In fact, all advisors make this claim because it helps them sell investment products.” Really?????
I am all for getting any bad apples out of the industry, and 100% in favor of a fiduciary standard. It’s these dishonest people that make the industry look bad. But to make claims that all advisors are dishonest and basically looking to cheat people out of their financial goals and dreams is just irresponsible reporting. Then again, maybe “all writers make this claim because it helps them sell advertising”.
I think you missed the point. Wall Street spends millions of dollars a year on lobbyists who fight regulations that would require transparency for advisors. Why? There is information about advisors Wall Street does not want investors to have. Since there is no requirement for transparency there is no need for documentation. This opens the door to pitches and false sales claims. Investors get away with deceptive sales practices because investors have no record of what was said to them. Wall Street could stop deceptive practices tomorrow by requiring transparency and documentation. But, that is not going to happen because it has its own conflicts of interest. Given this background, I think it fair to say Wall Street lets this happen. And, you an I know it happens every day or there would be nothing to hide.