Can You Trust Your Money Guy?

How to steer clear of incompetents (and cheats) in financial management.

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There’s a problem in the world of money managers. Not all of them are competent. Not all of them are honest — remember Bernie Madoff?

How do you know if you can trust your financial advisor? When you put your wealth into the hands of other people, they are placed in a privileged position. They can very easily take advantage of you. I’m not simply talking about outright thievery or Ponzi schemes. There are many small but nefarious ways money can be siphoned from your pockets. For example, a stockbroker is positioned to buy investments for himself prior to encouraging clients to buy them, which pushes up the price and guarantees the broker a quick gain. Another common practice is suggesting an investment but failing to inform clients that a comparable, less expensive option is available. When someone is handling your finances, you want to be sure they use their informed judgment exclusively to advance your best interests, not theirs.

Then there’s the problem of competence. Financial advisors should possess all the skills, training, knowledge, and experience necessary to do the job well. Among the proficiencies that are their duty are a strong understanding of economic science, financial history, and risk theories that inform their work on your behalf. Sounds essential, right? Surprisingly, a great many folks who style themselves as financial advisors lack much of this know-how. Unlike the historical professions of medicine or law, there is no single agreed upon credential for giving financial advice. Almost anyone can put up a shingle and start practicing. Whatever you think of lawyers, they are required to pass the bar and uphold a clear set of ethical standards. But many financial advisors, for example, have no training in economics and very few know the first thing about tax planning.

A person faces an explicit danger when he or she must rely on someone else for expert guidance or special skills. Society has traditionally mitigated this risk by turning to professionals and demanding that they live up to the various codes, rules, and ethics of their profession. In other words, those who have advantage over you because of their greater knowledge are entrusted with that power only in exchange for owing you the highest levels of duty.

The responsibility to “know fully what they are doing” has a legal name. It is called the duty of care. The advisors’ obligation to advance your interests rather than their own has a legal name. This is the duty of loyalty and it is, arguably, the most important thing society asks from its professionals. These two professional obligations, duty of care and duty of loyalty, together make up the components of fiduciary duty.

Here’s the catch. Not all financial service providers consider themselves bound by fiduciary duty. Many refuse to acknowledge it, some fight proposals to impose it, and others pay lip service to it while failing to truly live up to its demands. At present, even government regulators hold representatives of broker dealers to something less; the so-called “suitability standard” currently governs most financial advisors’ practices. That lower level of responsibility permits selling any financial product that is “suitable” for the client – even if it is the most expensive among many similar choices.

It is up to you to insist upon all appropriate responsibilities and obligations from anyone who lays hands on your money or influences the way you manage your wealth. As a most basic step, you should insist your financial advisor acknowledge their fiduciary duty to you in writing. Ask for a letter, on company stationery, and decline to hand over any money or sign anything until you receive it. Thereafter, watch like a hawk to make sure they live up to it. They owe it to you. In an ideal world, lawmakers and regulators would ensure that those responsibilities were complied with fully. Unfortunately, the way things stand today, the challenge of holding them to their duty falls to you.

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  1. I retired in February of 2012, after 39 years as a Financial Advisor. I have a BA in Economics and an MBA. On my own, I took courses in Taxation and Estate Planning, only because I thought that it was the right thing to do. I agree with Mr. Blum: Stock Brokers today don’t appear to have the academic skills to adequately advise their clients. That was especially evident when there was a Financial Melt-Down a few years ago. I believe that many were as panic-stricken as their clients were.might

    Several years back, there was a trend afoot to mandate that people who give financial advise must assume a Fiduciary Responsibility. Currently, Brokers are only required to provide investment advise that is “Suitable”. For instance, if you are 70 years old, a broker could recommend that you invest in a bond mutual fund; however, many brokers don’t even ask about other investments that you have, which could be 100% in bonds. In that case, some Equity–in order to keep up with Inflation–might have been more appropriate. However, it would have been “suitable”; so, he or she would have collected a nice commission and, meanwhile, they’d be on to the new client or prospect.

    Earlier this year, I Emailed FINRA (the so-called industry self-watchdog)) and asked if the question of brokers being required to give investment advice as a Fiduciary was ever decided upon. The response that I received seemed to all be “in code”. In effect, it was a “no response, response”. I think that meant NO; but, they were afraid to say so.

    I tell my former clients and friends to ask lots of questions: why are you recommending that stock or bond; rather than a sheet of paper, explain it to me; what does yesterday’s Federal Reserve actionactually mean; should the Government balance the Federal Budget now or Stimulate the economy some more; etc? Make your broker or adviser explain things to you and don’t be afraid to ask: “Are you sure?”


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