Well looky here what I got in my email box from Bloomberg Business yesterday, an article titled It Just Got Even Harder to Trust Financial Advisers. It’s kind of ironic because I just wrote about When It’s a Good Idea to Use a Financial Advisor, but I think it actually ties in quite nicely.
I’m constantly wary and torn about financial advisors. When friends ask me for a referral or if they should use one, I hesitate in giving a definitive answer, though more often than not I say to them “you probably don’t need one.” While on one hand they do provide an important service, I just think the way they make money is inherently flawed. The huge conflict of interest most advisors face makes it difficult for them to consistently keep their clients’ best interest at heart. Shoot, I think it would be hard for me too if I had money dangled in front of me all the time. Also, there’s such a wide range in education and training of financial advisors. While a healthcare professional such as a doctor, pharmacist or dentist, etc. has to go through extensive schooling and usually additional training on top of that and be licensed before they can practice, the same is not true of financial advisors. It doesn’t take much to call yourself a financial advisor, even according to Michael Kitces who has like 20+ letters following his name in credentials and writes about and advises, guess who, financial advisors. I know insurance salesmen calling themselves “financial advisors” but who have no real formal education or training in financial planning or investments other than passing a few exams to be able to sell insurance products. One such adviser said of those exams, they are “super easy. You just need to cram about 3 days before the test to pass.”
Healthcare professionals on the other hand innately seek and are trained to look out for the best interest of their patients (though of course there are unscrupulous healthcare professionals too!) Doctors take a hippocratic oath and actually so do pharmacists. This was the oath I had to take when I received my pharmacy white coat.
“I promise to devote myself to a lifetime of service to others through the profession of pharmacy. In fulfilling this vow:
- I will consider the welfare of humanity and relief of suffering my primary concerns.
- I will apply my knowledge, experience, and skills to the best of my ability to assure optimal outcomes for my patients.
- I will respect and protect all personal and health information entrusted to me.
- I will accept the lifelong obligation to improve my professional knowledge and competence.
- I will hold myself and my colleagues to the highest principles of our profession’s moral, ethical and legal conduct.
- I will embrace and advocate changes that improve patient care.
- I will utilize my knowledge, skills, experiences, and values to prepare the next generation of pharmacists.
I take these vows voluntarily with the full realization of the responsibility with which I am entrusted by the public.”
Unfortunately, I don’t think a lot of financial advisors operate under any universal oath. Though you can always ask to get in writing (and you should) that your advisor will be acting as a fiduciary for you. A fiduciary duty means an advisor will always seek your best financial interests. Hopefully soon a new legislation from the Department of Labor to make all financial advisors act as fiduciaries at least regarding retirement advice will be passed and more importantly enforced.
Don’t get me wrong, there are smart and honest financial advisors out there (somewhere), but it’s just hard to know which ones are the good ones and which ones are the wolves in sheep’s clothing. But it looks like one way to kind of weed out a bad advisor might be to see if (s)he works for one of these ten firms that had the highest misconduct rates:
So yea if you meet an advisor who says that work for UBS or Wells Fargo, probably shut your wallet and run the other way. Kidding. Incidentally, Wells Fargo appears on the both the highest and lowest misconduct rate lists. Unfortunately too, there are a ton of smaller firms/individual advisors who weren’t studied who are probably just as shady, maybe even worse.
What’s also really disturbing about the article but not really surprising when you think about it, is that the bad financial advisors are targeting “the unsophisticated consumer.” Not sure how the article is defining this unsophisticated consumer, but I’m thinking of people who know little to nothing about finance and probably don’t even realize they are being ripped off and hence wouldn’t even be reporting any misconduct. They see their balances going up and are happy because what they don’t see are the high fund and advisor fees eating up a huge portion of their investment and so they are actually making less than they should be. Moreover, any major loses can be explained away by saying “it’s just part of investing, you know market ups and downs.” I’ve heard unscrupulous insurance agents and financial advisors love to target the elderly and doctors.
“The President’s Council of Economic Advisors sounded the alarm on bad advice…”Right now,” its report warned, “your financial advisor—someone who’s supposed to be acting in your best interest—can direct you toward a high-cost, low-return investment rather than recommending a quality investment that works better for you.” The report found that conflicts of interest by advisers likely led to $17 billion of losses annually for working-class and middle-class families.
One reason why advisers with misconduct records stay in business is a lack of consumer sophistication. “Misconduct is concentrated in firms with retail customers and in counties with low education, elderly populations and high incomes,” the report states. The study’s findings “suggest that some firms ‘specialize’ in misconduct and cater to unsophisticated consumers.”
Bottom line, I’m not saying you shouldn’t use a financial advisor, obviously as I just wrote about it, but what I am saying is (1) put in the time to find a good one and (2) educate yourself. Don’t excuse yourself from learning about your finances and if you can, educate your parents, kids, grandkids. Don’t let them be the victims of greedy advisors. I might be feeling a little extra upset with financial advisors since this article actually hits quite close to home right now and I’ll be posting about what’s happening to my parents’ retirement investments and their advisor soon. >=(