how advisors cheat YOU Published on July 18, 2016 LikedUnlikehow advisors cheat YOU4Comment0ShareShare how advisors cheat YOU3 Lance Wallach Lance Wallach Business Owner at National Offices of Lance Wallach What Financial Advisers Forget to Tell Their Clients By L Lance Wallach | Submitted On October 20, 2015
13522
Do you ever get the feeling that financial advisers are looking out for themselves instead of looking out for their clients? You may be right. In most cases they really are looking out for themselves.
Unfortunately many financial advisers (brokers) do not have an accounting or finance degree. They have simply passed securities or insurance exams and the state and the federal authorities unleash them on the public. Even if they want to act in their client's best interest many times they do not have the skill set to do so.
To make matters worse, in most instances the financial adviser has a relatively light level of responsibility called suitability. The suitability rules require that when a broker recommends that a client buy or sell a particular security, the broker must have a reasonable basis for believing that the recommendation is suitable for that client. In making this assessment, your broker must consider the client's risk tolerance, other security holdings, financial situation (income and net worth), financial needs, and investment objectives.
Suitability abuse can be broadly defined as recommending or implementing an inappropriate investment based on a client's age or risk level, failing to disclose risks associated with an investment or failing to disclose materially important information that may lead to a more informed decision,
Let us look at an example of suitability abuse. A financial adviser we'll call Mr. X says they should buy an S&P 500 stock index mutual fund, as it is a suitable investment. Mr. X agrees and asks for a recommendation. If the financial adviser recommends the high load, high expense S&P 500 index mutual fund managed by the same firm the financial adviser works for instead of a no-load, low expense S&P 500 index mutual fund from another company, the financial adviser has met the suitability requirement. Coincidentally, the financial adviser would also receive a higher level of compensation.
How can that be you ask? Because the cards are stacked against the client. Clearly, suitability is not concerned about the best or most favorable service or product. To make matters even worse, many financial advisers work for publicly traded financial service companies. You know the ones that have their names on baseball stadiums, advertise during the Super bowl, and have their names stitched on the shirts of professional golfers.
These publicly traded companies do not remain in existence for the good of clients. They remain in existence for the good of shareholders. Can you imagine the chairman or chief executive officer (CEO) of one of those publicly traded companies coming on the evening news broadcast to say they place their clients' interest before their shareholders? First off, they will have violated the law. All publicly traded companies must act in the best interest of shareholders, not clients. Second off, their head would be on the chopping block.
No shareholder in their right mind would allow the chairman or any other board member to place any other party's interest ahead of their own. The shareholders hired the board to make sure management runs the company in the best interest of the owners-the shareholders, not clients.
how advisors cheat YOU
ReplyDeletePublished on July 18, 2016
LikedUnlikehow advisors cheat YOU4Comment0ShareShare how advisors cheat YOU3
Lance Wallach
Lance Wallach
Business Owner at National Offices of Lance Wallach
What Financial Advisers Forget to Tell Their Clients
By L Lance Wallach | Submitted On October 20, 2015
13522
Do you ever get the feeling that financial advisers are looking out for themselves instead of looking out for their clients? You may be right. In most cases they really are looking out for themselves.
Unfortunately many financial advisers (brokers) do not have an accounting or finance degree. They have simply passed securities or insurance exams and the state and the federal authorities unleash them on the public. Even if they want to act in their client's best interest many times they do not have the skill set to do so.
To make matters worse, in most instances the financial adviser has a relatively light level of responsibility called suitability. The suitability rules require that when a broker recommends that a client buy or sell a particular security, the broker must have a reasonable basis for believing that the recommendation is suitable for that client. In making this assessment, your broker must consider the client's risk tolerance, other security holdings, financial situation (income and net worth), financial needs, and investment objectives.
Suitability abuse can be broadly defined as recommending or implementing an inappropriate investment based on a client's age or risk level, failing to disclose risks associated with an investment or failing to disclose materially important information that may lead to a more informed decision,
Let us look at an example of suitability abuse. A financial adviser we'll call Mr. X says they should buy an S&P 500 stock index mutual fund, as it is a suitable investment. Mr. X agrees and asks for a recommendation. If the financial adviser recommends the high load, high expense S&P 500 index mutual fund managed by the same firm the financial adviser works for instead of a no-load, low expense S&P 500 index mutual fund from another company, the financial adviser has met the suitability requirement. Coincidentally, the financial adviser would also receive a higher level of compensation.
How can that be you ask? Because the cards are stacked against the client. Clearly, suitability is not concerned about the best or most favorable service or product.
To make matters even worse, many financial advisers work for publicly traded financial service companies. You know the ones that have their names on baseball stadiums, advertise during the Super bowl, and have their names stitched on the shirts of professional golfers.
These publicly traded companies do not remain in existence for the good of clients. They remain in existence for the good of shareholders. Can you imagine the chairman or chief executive officer (CEO) of one of those publicly traded companies coming on the evening news broadcast to say they place their clients' interest before their shareholders? First off, they will have violated the law. All publicly traded companies must act in the best interest of shareholders, not clients. Second off, their head would be on the chopping block.
No shareholder in their right mind would allow the chairman or any other board member to place any other party's interest ahead of their own. The shareholders hired the board to make sure management runs the company in the best interest of the owners-the shareholders, not clients.
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