Unfortunately, most "financial advisers" don't have a fiduciary obligation to do what is best for their clients. The term "financial adviser" can be used by just about anyone--stockbroker, insurance salesman, banker, etc.--who deems him/herself capable of giving advise. Only Registered Investment Advisors (RIAs) are required to meet a fiduciary standard of doing what is best for the client. Other "advisors" may be held to another standard (stockbrokers, for example, are required to determine if an investment is "suitable", which can be very broadly defined) and some to no professional or ethical standards at all. While no population of advisers are perfect, RIAs are required to disclose conflicts of interest and are held to higher ethical standards. Those that hold the Certified Financial Planner (CFP) mark or are members of the National Association of Personal Financial Advisors (NAPFA) commit to high professional and ethical standards as well, as do Personal Financial Specialists (PFS), who are CPAs who have demonstrated to their professional organization (and state licensing boards) that they are committed to ethical practice. These folks are still human and there will still be those among them who will violate the standards they've agreed to meet, but at least they have said they would try.
Should You Sue Your Financial Adviser?
How to tell the difference between a failed investment and fraud.
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Bosses Behind Bars
From Bernard Madoff to Martha Stewart, a look at the men and women forced from their corner offices and into a federal pen.
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Bernie Madoff ruined it for financial advisers this year. Under Madoff's scheme, investors from schoolteachers to banks to high-profile celebrities lost up to $65 billion. The kicker? Few of them asked Madoff and his team of advisers to explain the oddly high returns they consistently earned, or the vague statements they received.
Madoff may be in jail now, but the days of blindly trusting financial advisers are over. Just how do you screen, hire, and monitor a trustworthy money manager? What red flags should investors keep an eye on? To find out, NEWSWEEK's Nancy Cook spoke with Mark Britton, former senior counsel for the Securities and Exchange Commission and founder of Avvo.com, a Web site that connects consumers to lawyers offering free legal advice. Excerpts:
How should people go about hiring a financial adviser?
You need to do due diligence up front. When you walk in the door, you should be given a stack of documents. There will be a prospectus that is chockablock full of risk factors. The problem is that most people don't read it, and they sign off on the documents. Your financial adviser should be treated no differently than other employee you work with. For example, I run a company. I make sure I'm in constant contact with my employees. Somehow when it comes to financial advisers, people take a different tack. They just let the adviser make all of these investments on a discretionary basis without talking to them. Some funds are hard to get your head around, but that doesn't reduce [your] obligation to check in, even on a weekly basis. If you're communicating effectively, you'll seldom be caught off guard.
What are the some of the most common complaints about financial advisers?
They make false or misleading statements or omissions as they relate to securities. They tell clients that certain securities are like cash when they're actually debt. Another common thing we've seen are brokers or investment advisers who tout stocks as sure things and fail to disclose the investments' risks. Another big problem is unsuitable investments. If you place your clients in securities, the broker has the fiduciary responsibility to do due diligence with the client's investment strategy. The best example is a client living on a fixed income, whose financial adviser makes trades that are too risky.
How do you discern the difference between failed investments versus out-and-out malpractice by your financial adviser? What are the telltale signs?
It's important to counsel people to think through things rationally. Today, what's happening is that investment portfolios are cratering, and there's lots of news about fraudulent financial advisers. Of course, the question is, is the lack of performance in the portfolio due to some kind of fraud?
Some signs that clients should watch for is when your adviser stops communicating with you. That is a red flag. If you're reading the documents that your adviser gives you, he should be able to summarize anything you find confusing. It's a problem if they're not willing to do that to get your business. Another thing is to make sure to look at your financial statements. The statement should make it crystal clear how the returns line up with the objectives of the investments. And you should measure the objectives. Is allocation of investments where I said it should be? Is this the regularity of the trades what we expected? Is the return what we thought it was?
What should you do if you think your adviser is a crook?
Engage a lawyer. They see this stuff day in and day out. [But] if you're looking to recover money, remember that a lawyer will take a 20 to 30 percent fee. This upsets some people, but 99 percent of the population couldn't represent themselves. When you're hiring a lawyer for this type of case, you can't just go hire [any] lawyer. You need one that does financial-services litigation on the plaintiff side. When you actually engage the lawyer, he's going to ask you to turn over every piece of documentation as it relates to your claim. They'll ask you to tell your story. If they assume facts are true, they can assess for free if you have a case or not.
Is it hard to sue a financial adviser?
Fault is very hard to prove. The one recommendation that I always give is that, if you have critical communication with your adviser, you should do it in writing—even an e-mail. Talk is cheap, and talk is very hard to prove in court. Getting your case in front of a jury rather than in arbitration can also be very valuable to you. You can tell people, just like you, how your financial adviser mislead you.
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