Can I Trust My Financial Advisor?

April 4, 2016

Can I trust my financial advisor?  It is a legitimate question for an industry that is built on trust.  And yet, a recent working paper by business school professors at the University of Chicago and the University of Minnesota found that 7 percent of financial advisors have been disciplined for misconduct ranging from putting clients in unsuitable investments to trading on client accounts without permission.  Even more troubling, the report indicated that several well-known firms are among those with the highest rates of misconduct.


For example, the study found that over 19% of the advisors at Oppenheimer & Co. had been disciplined.  Other poor performers included First Allied, Wells Fargo Advisors, and UBS Financial Services which all had misconduct rates of over 15%.

 

One of the issues the industry faces is the commission based pay model employed by most brokerage firms.  Under this model, advisors are paid a commission to ‘sell’ specific investments.  Alarmingly, under current law, a broker who you hire to provide advice can recommend a high-cost, low-return investment rather than recommending a higher quality investment that would work better for you.  Why would a broker do this?  Perhaps because the high-cost investment pays a higher commission.  Even well-meaning advisors may recommend the firm’s most profitable investments simply because that is what they are instructed to do.

 

A new fiduciary rule is working its way through the Department of Labor which would hold all advisors to a higher standard of care.  While not eliminating the commission model altogether, the new rules would require all brokers and advisors to provide financial advice in the best interest of the client – something called the ‘fiduciary standard’.  It is strange that such a rule does not exist!  The proposed rule has faced a significant backlash from the industry and as a result, the rules have still not been issued after 5 years of work.

 

So how do you know if you can trust your advisor?  The first and most important step is to ask questions.  Make sure that you feel comfortable with the investments that your advisor is recommending and how your advisor will be paid.  It is your money and you have a right to understand how your money is invested.  Are your advisor's recommendations and explanations consistent and clear?  Next, make sure that you do your homework.  You can research your financial advisor on the Financial Industry Regulatory Authority (“FINRA”) website:  brokercheck.finra.org  Look for ‘disclosure events’ that would indicate that this advisor has had issues in the past.  Finally, I recommend working with an advisor that does not take commissions and already follows the ‘fiduciary standard’.

 

As a fee-only advisor, we at Cedarstone Advisors are already held to the fiduciary standard and never take commissions.  We welcome you to research our background on the broker check website.  Finally, we hold ourselves to the highest ethical standards and believe that there is no room for deceit, doubletalk or concealment.  In short, we recognize that the trust of our clients is the foundation of our relationship and our business.  If you don’t feel like you can trust your advisor, please give us a call.  We would be happy to share more about how Cedarstone is different.

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