The media exposes financial advisor incompetence is an example of how good reporting benefits investors. Advisor incompetence, schemes, and rip-offs seriously undermine investor wealth. So, investors need to be aware of these issues and learn how to protect their wealth. Investors can protect wealth by first understanding how the schemes work and how they affect investment portfolios. As well, the lesson covers the warning signs of bad advisor behavior and how investors can deal with advisor conflicts.
Investors need to be aware of financial advisor mistakes or schemes that can cost them money. Becoming aware of these issues helps them become better investors and protects their wealth. Knowing the warning signs of bad advisor behavior While shopping, a woman is surprised to learn what her financial advisor has done! Beside surprised, she is concerned how an advisor mistake or ripoff effects her investment portfolio.
What you learn from: Media exposes financial advisor incompetence
This lesson covers how to protect your wealth from bad advisor behavior, including knowing how schemes work and how to deal with advisor conflicts. It highlights the important role of media coverage serving the public interest and especially how investors benefit from independent media coverage. It also discusses how, why, and when investors can use media reports to improve their knowledge of investing. In addition, follow links at the end of the lesson to access related content.
FAQ about media exposes financial advisor incompetence
Investors want to learn how to protect themselves and deal with a bad advisor. The following FAQ and answers about financial advisor incompetence help investors learn how these fit into the broader investment picture. Some answers do overlap which provides context within those related topics.
Are there reasons not to use a financial advisor?
Don't keep an advisor that is not working in your best interest.
The right financial advisor can be beneficial, but many lack essential investment knowledge. Advisors without expertise or qualifications put your wealth at risk.
Very few trained investment managers are financial advisors. Most are salespeople following management directions. That can mean advice and recommendations favoring the company over a client's best interests.
Even the contracts and documentation clients must sign protect the companies from fiduciary obligations but don't protect investors.
Investors need an advisor that works for them with the investor's best interests in mind. The alternative, learning to manage your investments, requires time, knowledge, and effort.
How do financial advisors get paid?
Financial advisors are paid a portion of sales or transaction commissions, a split of client account fees, and other fees. Those other fees are splits of a fund and financial service company payments made when their products or services are used. While investors also pay mutual and other fund fees, many funds also share those fees with advisors. And because they get a cut of mutual fund fees, many advisors recommend them over lower-cost ETFs that do not pay. As a result, mutual funds produce lower investment returns than comparable ETFs. That difference comes from investor pockets. Those and most fees are paid annually with good or bad results. And as always, any investment loss, any other cost, or risk is borne by the client. Fee-only advisors provide an alternative.How can brokers take client money?
Brokers seldom commit outright fraud or theft. But client money can get taken through increased costs without client benefit. Churning, inferior products, and mutual fund loading are more common."Churn to earn" is how inferior financial advisors generate commissions from unnecessary trades. The trades generate commissions but give clients little or no benefit.
Second, selling inferior products to clients as "suitable" when better ones are available does earn advisors' fees and commissions, but the client gets a subpar performance.
The third is the common practice of loading client accounts with high-commission mutual funds. Brokers and companies split high recurring fees when comparable ETFs can improve investor returns by up to 100%!
What are the signs of a bad financial advisor?
Trust your instincts when selecting a financial advisor. If you feel something is wrong, look elsewhere.
Avoid advisors who are not transparent about their fees or are unwilling to negotiate, as this is not in your best financial interest.
Effective communication means your advisor is available and responsive, and their explanations make sense to you. If not, consider other options.
While paying attention to negative rumors about an advisor is essential, verifying the information before making any decisions is equally important.
Never tolerate an advisor who intimidates, bullies, or disrespects you. If your advisor reacts negatively to your questions, find a new one.
Your money and future are at stake, so only settle for what feels suitable.
How do I deal with a financial advisor problem?
Think through the issue. Simply losing money on an investment is not grounds for a claim.
But if abused or wronged, you have options. First, try to resolve the issue with the advisor.
Document everything because you need a well-thought-through plan if the advisor does not resolve the issue. Write down your problem or complaint and record every contact and action you take.
Any misrepresentation of an investment can be a serious issue. As well, any unsuitable investment is a big issue. Contact the branch manager.
If that does not resolve the issue, file complaints with the company, the standards body of any professional organization, and the security commission.
Finally, you can hire an attorney and take legal action.
Should I talk to a financial advisor before investing?
If you need more time or knowledge, seek guidance from an advisor to invest well.Before making a decision, interview both fee-only financial planners and advisors to ensure the advisor you choose has experience dealing with clients like you.
Choosing an advisor with the expertise to create a plan and investment strategy that matches your circumstances, tax situation, and goals produces the best outcome. The best advisors help clients become more knowledgeable and successful investors.
Core content:
Media exposes financial advisor incompetence
Wise investors are grateful for good media work. An example is a report that exposed colossal financial advisor incompetence. This was hidden camera documentation in the consumer information show, Marketplace on CBC TV in Canada called, Show Me The Money, by hostess Erica Johnson. This 22 minutes of must-see TV helps inform investors of financial advisor misses, mistakes, and rip-offs that risk wealth.
Erica Johnson CBC Marketplace hostess
It's important for stock market investors to be aware of financial advisor incompetence and schemes that can seriously undermine the investor's wealth. The media has done a great job of exposing these issues.
Undercover cameras
A fitness instructor pretending to be a person with no financial knowledge goes undercover seeking money advice. In the scenario, she inherits $50,000 cash, has a family income of $102,000, a mortgage of $74,000, and a credit line of $25,000. She has no financial experience so seeks professional advice.
Anyone with financial knowledge will be horrified by what she records. It demonstrates some of the many conflicts of interest that the financial industry and financial advisors have. For example, financial advisors can make more money by exposing their clients to more risk. In this case, they even suggested investing could be a free ride!
One investor's experience with financial advice led to financial ruin and the loss of both his home and marriage.
In the Marketplace segment, you can watch how media exposes advisor incompetence. You learn of many risks and misses that await the uninformed investor in that short period. Visit the link above to watch outrageous promises, misinformation and appalling financial advisor incompetence.
Use quality financial advisors and planners
Do not let this lesson, Media Exposes Advisor Incompetence, keep you away from financial advisors. There are quality, competent financial advisors and financial planners that are well worth their fees. Unfortunately, there are far too many that are not. Some are outright rip off artists, others incompetent and some even dangerously ignorant. Too many do not know investing basics let alone how to invest well or what advice to give.
Inform yourself, watch the Show Me The Money episode.
Avoid problems - Pick the right advisor
Investors must be active partners in a relationship with an advisor. That means speaking up and asking questions. Investors must speak up when they do not understand an investment. Doing that allows a responsible advisor to ensure an investment is fully understood before buying it for the client.
The very best way to avoid financial advisor incompetence is to do your research and check an advisor's background for any disciplinary issues. Then, be honest about what you do and do not understand, inform yourself and keep up to date about financial advisor schemes and how they work. Always remember, caveat emptor, in a buyer beware world, be the aware, informed buyer.
How bad advisors pick investor pockets
Investors that do their homework and research the background of any prospective advisor can avoid most advisor mistakes, missteps, commission schemes and rip-offs. Being aware of bad advisor behavior helps investors recognize when to take action to protect themselves and their accounts. Read on to learn the most common bad actions.
Four bad advisor behaviors
Bad advisor pocket picking uses four strategies: churning, selling dividends, breakpoint plays and unsuitable transactions.
Churning
This bad advisor behavior is a well-established way to work a client account. The “churn to earn” strategy lines advisor pockets with commissions on unnecessary trades that deliver little or no benefit to the client. Bad advisors can continually propose more trades as their answer to any and every inquiry or client issue.
Selling Dividends
Clients are advised to buy a stock or mutual fund now, before an ex-dividend date. The client is urged to pick up easy “profit” by collecting the pending dividend. But the advisor does not point out the typical stock or mutual fund declines by the amount of the dividend on the ex-dividend date. That means buying produced no real return and may produce a tax liability. Either way, the client loses a little or a little more, but the advisor pockets more commission.
Breakpoint Plays
Fund companies such as mutual funds often offer lower sales charges to investors that buy more. In effect, those breakpoints discount the sales charge to encourage investors to buy more. That discounted charge also lowers the advisor’s commission percentage. Bad advisors avoid the fee discount by making multiple fund purchases to keep all funds below the breakpoints. As a result, their clients never benefit from sales charge discounts.
Unsuitable Transactions
This is the catchall of bad advisor behavior. Unsuitable transactions are pocket picking moves that have not considered or have simply ignored the client's circumstances or investment objectives. Advisors should make investment recommendations that fit the needs of clients. Bad advisors simply don’t do that part of their job. Bad tax moves, inappropriate risks, over exposure or concentration in one security, and illiquid investments are the most common unsuitable transactions.
Being account aware avoids bad advisor issues
All investors should be account aware to know and understand what is in their accounts. That does not mean daily reviewing of the account, but it does mean regular check-ins to keep up with what is going on. Being aware of accounts and carefully examining investment proposals avoids most broker frauds.
Understanding options to advisors
There are advantages, disadvantages and options when considering a financial advisor.
The financial advisor downside
Using a financial advisor has some disadvantages. There is a risk that the advisor lacks the knowledge or qualifications to properly manage your wealth. Furthermore, financial advisors may be more concerned with meeting the goals of their company than with meeting your needs as an individual investor. Few financial advisors have fiduciary duties to their clients, which means they are not obligated to act in your best interests. The companies and their employees including the advisors hide behind contracts and documentation. That paperwork is written between you, your financial advisor, and the company and usually benefits the company more than the investor.
However, avoiding a bad advisor by investing on your own has challenges. To invest well without an advisor takes time, knowledge, and effort. There are other ways but doing your homework is a good start. Research can uncover good advisors and satisfied clients. Any investment in knowledge and research pays off with a lifetime of returns. So, taking the time and effort needed to check references and background is well worthwhile.
Most financial advisors receive limited initial training
In most cases, financial advisor training focuses on serving the best interest of the company rather than the best interest of the clients. Limitations of initial training include,
- Trained to sell, follow orders, policies, and company recommendations.
- Not educated in investment skills.
- Focused on product knowledge not investment knowledge.
- Paid to produce revenue for the company, not paid by client results.
Contracts and agreements provide liability shields
In most cases, in most markets, financial service companies get clients and employees to sign contracts and agreements that provide liability shields for companies and advisors.
- The suitability standard avoids any fiduciary obligation to clients.
- Suitable investments are appropriate for the investor's circumstances.
- Suitability has no obligation to provide what is in the best client interest.
- Suitable investments may have more cost and commission than alternatives.
- In contrast, fiduciaries have legal and ethical obligations to act in the best interest of the client with full disclosure and honesty.
Consider the fee-only advisor option
As always, investors with knowledge do best. That includes knowing about fee-only advisor and financial planner services. You can use them as helpful sources for your education and development as an investor.
How is fee-only advice different?
Fee-only financial professionals are fiduciaries and professionally qualified in most jurisdictions. They provide transparent, conflict free, objective advice. But there are cons. Fee-only is not a full-service shop, the service usually costs more initially but overall can be a small fraction of the alternative cost. You may get excellent advice and a plan, but must execute the plan yourself or find needed products or services elsewhere.
Most financial advisor compensation alternatives are built around sales commissions and annual fees based on account totals. While the front-end cost can be lower, the annual fees can be a significant portion of returns. Many alternatives are not fiduciaries, have conflicts, and may be less qualified. To be sure, always ask.
A fee-only service ensures advice and recommendations can be trusted. Such service providers have no financial incentive to sell you one or any product over another. In contrast, commissioned advisors or bank employees have at least some conflicts of interest.
Paying a fee-only financial planner to create a plan and get you started can be a great way to get established as an investor. Their service packages have a range of costs which do vary depending on the services you need.
Signs, signals and bad advisor warning
It's your money! If an advisor and their company make more money off your money than you are, or you have no return, something is seriously wrong! Yes. they are in it for the money, but if that is not also working for you, it is time to find a new advisor. So, we need to know what to look out for.
Signs of a bad financial advisor
Bad financial advisors indicate they may not have the client's best interest at heart when they put out signs wise investors avoid. Such as:
- 1Having no, or part-time, fiduciary obligations (falling back to the suitability standard).
- 2They are paid from multiple sources (conflicts).
- 3Their fees are high and inflexible.
- 4They claim to offer exclusive services and products.
- 5Their plan is one approach and one size fits all without customization.
- 6They don't contact you unless you contact them first.
- 7You or your spouse are ignored or feel ignored.
Financial advisor checklists
Checklists can be helpful when dealing with financial advisors, investments, and investing.
Financial Advisor/Planner question checklist
Ask yourself:
- What are you looking for from a financial advisor?
- Do you want help creating an investment strategy?
- Do you need tax guidance?
Ask a prospective advisor:
- Do you work with clients like me?
- What portion of your clients are like me?
- How much do you charge?
- How do you charge?
- Do you make money from investments that I buy?
- What services do you offer? Planning? Active management?
- How often do you meet with clients?
- How often do you review the portfolio?
- How do you contact clients?
- Are there limits on how often I can contact you?
Checklist of financial advisor rip-offs
In most cases, both a financial advisor and the company they work for collect fees and commissions based on what you buy. If you are aware of this and agree to it, fine. But if that is news to you, or you learn that they also get paid from other sources, reconsider. You may want to check the understanding and expectations you have in your relationship. Consider these points:
- Has your financial advisor explained in writing how they get paid?
- Does your financial advisor know you?
- Do they claim to outperform?
- Do you infrequently hear from them?
- Do they only sell you mutual funds?
- Do they only contact you to sell something?
- Do they provide a written financial plan?
- Do they have more than minimum qualifications?
- Do they only sell products from their company?
- Do they have hot stock tips?
- Do they review results against benchmarks?
- Are results your net return after all cost?
- Are there any trailer fees on your account?
Takeaway points for media exposes advisor incompetence
Investors benefit from media coverage that improves their knowledge of investing. Being informed of advisor misses, mistakes, schemes and rip-offs helps investors defend themselves and their investment wealth. The lesson takeaways include,
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lesson links:
Overview of investment choices Lesson 290.01
Key investing success choices Lesson 290.02
Join exceptional wealth builders Lesson 290.03
Investing time or adviser time? Lesson 290.04
Media exposes advisor incompetence Lesson 290.05
Small investors have advantages Lesson 290.06
5 Secrets of superior investors Lesson 290.07
Avoid 6 investing sins Lesson 290.08
Investment impatience destroys wealth Lesson 290.09
3 Yeses or no investment Lesson 290.10
Investing can be fun, interesting and slow Lesson 290.11
Warren Buffett explains gold Lesson 290.12
Stock trading halts explained Lesson 290.13
FAQ about money making investment choices Lesson 290.14
FAQ about financial and investment advisors Lesson 290.15
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