Fire your financial adviser, unless they are a fiduciary

January 24, 2011

Eric Brown, a senior registered sales assistant with Double Diamond Investment Group, works at the company's office in Parsippany, New Jersey March 23, 2010.  REUTERS/Lucas Jackson If you have a conventional stock broker or agent acting as a financial adviser working on commission, fire them.

Now that the SEC has endorsed a “uniform fiduciary standard of conduct” for brokers and investment advisers, there’s no reason to settle for anything less. This is a financial professional who, by law, must put your interests first.

In the past, the SEC did little to protect you from the ravages of a commission-driven world. Few knew the difference between a “financial consultant” (a broker) or a “certified financial planner” or “registered investment adviser.” The latter two are fiduciaries.

Having a fiduciary is one of the best investor protections around. If they wrong you, you can sue them. As a requirement of the Dodd-Frank financial reform law, the SEC needs to write the rules codifying this key investor protection and Congress needs to rubber stamp it.

It’s also time to move on to fix the broken system that deals with investor disputes. With brokers and agents, you typically sign away your right to sue. You are then subject to inadequate “suitability” standards that don’t offer much protection at all. Not only is it extremely difficult to sue, you are forced to settle most disputes in an industry-run arbitration system.

Countless investors are cowed by the process of proving that they were sold inappropriate investments by brokers. Although the industry doesn’t release the numbers — they should — most investor arbitration lawyers say that about 80 percent of wronged investors settle with brokerage firms for a fraction of what they are owed rather than go through arbitration.

Not surprisingly, investors don’t like the fact that even if they choose the arbitration process — which is billed as a cheaper alternative to litigation — it will cost them thousands in an attempt to get their money back and will face at least one industry member on a three-person arbitration panel. It’s like having a lawyer being the foreman of a jury in a legal malpractice trial.

The securities regulator FINRA is examining alternatives to remove the industry representative and give investors the right to sue in court. We can only hope these become permanent options.

The even bigger scandal is that securities brokers will be still largely self-regulated by an industry organization called FINRA. The group is charged with policing firms, providing background checks on brokers and running its arbitration forum.

How, you wonder, can an industry that powerful and wealthy effectively police itself and more than 600,000 brokers? The bumbling fictional film detective Inspector Clouseau would have been a better regulator in recent years.

FINRA missed the 2008 meltdown, the Madoff scam and failed to prevent more than $150 billion in losses in complex and structured investments that made their way into retail products like mutual funds, according to a soon-to-be published study I conducted for The Nation Institute.

Even if the new SEC rule covers all broker-dealers and advisers, it may not fully cover insurance agents, who sell securities products in the form of troubling variable and equity-indexed annuities. That’s another reason that you shouldn’t rely upon anyone other than a fiduciary for comprehensive financial advice.

In the past, the securities and insurance industries have relied upon more disclosure as an alternative to more protection for investors. Have you read a prospectus for a complex financial product lately? Does it clearly spell out the risks and costs? Most don’t.

Risky investments don’t need more disclosure — they already have plenty of that — they need cigarette-type labels that tell you up front “this investment is hazardous to your wealth.”

The SEC and FINRA still aren’t doing their jobs in an age in which ladders, toy packaging and dry cleaning bags have better warnings. Making most financial professionals fiduciaries is positive development, but you need to take the first step in hiring one now to ensure that your best interests are being served.


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Are we becoming so dependent on professional advisers that we are failing to develop independent judgement and decision making skills?! As a society, when we rely totally on our doctors, psychiatrists, counsellors and advisors, our only recourse when things turn sour, is to sue the professional concerned.
We must educate ourselves to exercise independent judgement and not get carried by GREED!
No matter how many laws we introduce for our protection, we shall always have to deal with complex and exotic financial products and must teach ourselves to avoid getting conned by the many unscrupulous people who peddle such products.
Simple adage for the lay investor: Don’t get into something that you don’t fully understand – a fool and his money are soon parted!

Posted by Ugottabesick | Report as abusive

Great, more lawyers and legal fees. If you want to be sure your best interests are served then get educated.

Posted by DavidS95 | Report as abusive

All good advice. Education and self reliance are indeed important, but first you need to now how to avoid bad advice and conflicted relationships.

Posted by johnwasik | Report as abusive

Look at your advisor’s credentials. Chances are if you are working with a broker they are just sales people with no background. The insurance industry is even worse. Variable annuities are for suckers. check out if you want to aviod conflicts of interest.

Posted by Upstate184 | Report as abusive

[…] Fire your financial adviser, unless they are a fiduciary – Reuters […]

Posted by SEC calls for uniform advisory standard | Financial Advisor regulation | Report as abusive

“Troubling indexed annuities?” What is so troubling? Indexed annuity purchasers have the ability to deposit their money with an insurance company, defer taxes on the monies until they begin taking income, receive 10% withdrawals of the account value annually without being subject to penalties, pass on the full account value to their beneficiaries upon death, and receive a guaranteed income they cannot outlive. I don’t see what’s so troubling? The average commission is just above six percent and paid a single time (at point of sale), the products have been dramatically simplified, and the average 26-page contract provides oodles of plain-language disclosure. Perhaps it is the guarantee of principal, guarantee against loss due to market downturns, and the ability to outpace traditional fixed money instruments that is so “troubling?” I don’t know- you tell me.

Sheryl J. Moore
President and CEO
(515) 262-2623

Posted by Indexed_Girl1 | Report as abusive

I expect that most of these professional advisors have lost a lot of money for their clients over the past five years.

With fiduciaries, the only thing you gain is someone who is perhaps less likely to intentionally mismanage your money for his own gain.

I agree with Ugottabesick that it’s far better to do your own research and peel those leeches off from your money.

It’s easy to beat their performance and you don’t have to pay yourself a commission.

Posted by breezinthru | Report as abusive

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This measure will have no affect on how financial advisers shift their behavior onto the path of reacting to incentives. The SEC is still woefully underfunded.

What nearly every American does not understand is that this behavior has been endorsed from the top down and if particularly affects those who walk the edge of ethics.

Posted by csodak | Report as abusive

[…] Fire your financial adviser, unless they are a fiduciary Jan 24, 2011 11:01 EST Posted by Reuters […]

Posted by Thrive Past 55 » Fire your financial adviser, unless they are a fiduciary | Report as abusive

I’ll second the plug. Fee-only advisors earn money based on your assets, period. They sell nothing except advice.

To vialli10 – diversifying doesn’t always work, note the financial crisis.

And this has nothing to do with lawyes and legal fees. Its about NOT trusting someone who is motivated to sell you something you don’t need (insurance & brokers)

Good article.

Posted by BHOlied | Report as abusive

of course financial advisors lost clients money. If you can’t handle the risk, invest in treasuries and enjoy your 2%.

You cannot have gains without risk, period. And fiduciaries in the right environment have no gain from “mismanaging” your assets. If a fee-only advisor is managing your money and it goes down, their revenue is directly impacted. They can ONLY gain when your assets rise.

I laughed out loud when i read your “leeches” comment. Average fee charged on assets is 1%. What a bunch of jerks! haha – how much are you paying on those mutual funds?

Some people spend their entire careers learning and researching and you’re encouraging people to believe that you can do it in your spare time? Now that is bad advice.

“Its easy to beat their performance”? How would you even begin to know?

The point of the article is to NOT invest with or follow advice from those who are untrained, untested and NOT held to a fiduciary standard.

If you are like breezin you can sit on your couch holding your life savings in your lap and pray that you get lucky because luck is what you’ll need.

Posted by BHOlied | Report as abusive

Just because someone is compensated by fees rather than any other approach guarantees nothing. In fact, a large percentage of brokers also act as Fudiciaries and have the same requirements. Unfortunately, most fee only advisors are quite limited in what they can provide their clients as evidenced by their relatively poor performance during the last downturn. Furthermore, there’s a reason that congress and SEC very explicity state that compensation and Fidiciary responsibility are completely independent issues.

Posted by DLW678 | Report as abusive

I have to agree with the comments that say it’s best to manage your own money but that may require that only those with MBA’s will ever be able to invest in equities and bonds.

But that is not what the financial industry really wants. It needs the less informed and those who view stocks as a form of gambling. It feeds on them or the markets will shrink and become far less volatile. Without the volatility the brokers don’t make their larger commissions.

And @Ugotabesick – there are real dangers to trying to be your own physician and it is illegal to try to treat anyone else without certification by the AMA. There is also the adage – “A man who defends himself in court has a fool for a lawyer”. But modern society doesn’t want self reliant people even as it complains about the burden or rising health care costs and consumer lawsuits. It would put many service type jobs out of business.

But obviously people haven’t learned much of a lesson since Madoff’s scam, or the older Dot Com mania, that companies like Facebook – with no real assets to speak off – and little factual data to base their investment on, can still raise $1.5 billion on what are essentially rumors and blandishments. The fact that most of the stock has not been offered on the exchange – and the reputed value of the company is derived from the small number of shares that were actually offered – should give pause to anyone who thinks that that value will hold when greater amounts of stock are put up for auction. I can’t help but think of that as a fraud and a scam. If any of the major owners of Facebook stock – the founder and his co-conspirators, were to try to sell their stock, the price would most likely plunge, the way the price of diamonds would collapse if De Beers ever released the tons of gems they hold in storage.

On Wall Street, fraud is as much an abstraction as many of its product lines.

Posted by paintcan | Report as abusive


Thanks for the advice but I’ve been doing quite well. I moved my managed money back into stocks at the end of November to ride the QE2 lift. I don’t know yet how long I’ll be leaving it there, but I picked a fund with no penalty for an early exit.

In case you’re looking for some free advice, I had my personally managed money in APL until about three months ago. I’ve been in WTR since then. I’ve been doing very well with that, much better than 2%.

I know… not very diversified, but as you mentioned, I don’t have time to fully research hundreds of companies. Besides, it’s not all of my money.

I do have a screener though and a brain and I’m not excessively greedy. I don’t try to outsmart the market everyday. I buy and hold until it seems prudent to buy something else or to cash out for a while.

Whip out your calculator and work out how much the compounding effect of 1% commission over the course of many years has been costing you.

BTW, a leech is actually a good analogy. I’m from Minnesota and there are plenty of leeches in our lakes. They don’t take much of your blood, you don’t usually even notice them, it’s usually someone else who will point one out, but they will keep sucking off a little blood for as long you let them.

Posted by breezinthru | Report as abusive

Take away commisions, replace with fees. Take away abitration, bring in lawyers and ability to sue. This is just moving money from the left hand to the right hand.
Fiduciaries will only have you sign something saying you are aware of the risks and agree to it, which like the prospectus investors are not going to read anyway.

Although some brokers do not always act in their client’s best interest a majority of them actually have been in business for years and are actually interested in maintaining client relationships.

The statement “FINRA missed the 2008 meltdown” also shows you don’t understand FINRA’s role in the indutry. There are not there to forecast or judge the merits of an investment vehicle.

Posted by Tical | Report as abusive

Vanguard has started selling a variety of annuities, although it still works through insurance companies. I would imagine other firms will eventually follow. The load is significantly under that charged by the local CFP/adviser community. It will be hysterical to see the adviser dance as the profitability is drained from that product.

From Bloomberg 1/24/2011:
“Vanguard Group Inc., the asset manager that pioneered low-cost passive funds for retail investors, gathered more client money last year than any competitor, becoming the world’s largest mutual-fund company and closing ground on its competitors in exchange-traded funds. ”

And the problem with the 6% load is IT NEVER GOES AWAY AND ALWAYS IMPAIRS THE RETURN ON THE ASSETS. You don’t ‘recover’ from the reduction in the asset base.

Posted by ARJTurgot2 | Report as abusive

First, let’s talk about equity-indexed annuities. I say they’ve been troubled because of marketing abuses. Don’t take my word for it. NASAA, the group that represents state securities regulators, found that these kinds of annuities have been cited in one-third of investment abuses involving seniors. See ent_NASAA_Headlines/9280.cfm. Marketing of these vehicles are poorly policed and commissions are high — 6% is hardly a bargain in a world in which ETFs can be sold at NO commission and provide much better coverage of most asset classes. And to set the record straight, the fiduciary or fee-only model is not without its flaws. Bernie Madoff was supposed to be a fiduciary. But right now, it’s a better model that places legal responsibility squarely with the advisor, who must do right by the client instead of being hostage to a quota/commission schedule. The SEC made a huge leap forward, but it’s up to individual investors to police their advisors. No agency will ever have enough cops on the beat.

Posted by johnwasik | Report as abusive

When evaluating financial advisory firms, what questions are most revealing?…

A good question to ask is how they get paid . . .

Are they solely paid fees by you, the client, for their advice and expertise, similar to how you’d pay a CPA or attorney, or are they paid commissions and/or fees by 3rd party product manufacturers (…

Posted by Quora | Report as abusive

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