Will the Real Financial Advisor Please Stand Up?

Will the Real Financial Advisor Please Stand Up?

In the financial services industry, there's no shortage of people calling themselves financial advisors and wanting to give you financial advice. Stockbrokers, CPAs, insurance agents, investment advisors, financial planners and even some attorneys are calling themselves financial advisors. But how many of these individuals are really interested in providing you financial advice? Which ones would rather sell you products and services? Which ones are looking out for your best interests as opposed to their own? Although the answers to those questions can have a critical impact on your financial success and your family's financial security, most individuals have no idea what differentiates one financial advisor from another. So let's find out.

What is a Financial Advisor?
On the most basic level, a financial advisor is an individual who is paid to provide financial advice. But when you get into how that individual is paid and regulated, there is widespread disagreement throughout the financial services community as to who should rightfully be able to call him or herself a financial advisor, and what you should expect from yours.

Wolves in sheep's clothing
In the wake of scandals, fines and public distrust, the brokerage industry has sought ways to improve its public image. Smith Barney (which recently agreed to pay $50 million to settle a class action lawsuit alleging that the firm dumped stocks in their large institutional clients? accounts by selling them to their individual clients with broker-managed fee-based accounts - nice, huh?) is trying to clean up its public image by calling its stockbrokers (a name commonly associated with individuals who sell high-priced financial products for a commission) "financial advisors" (a name more commonly associated with financial planners  who provide financial advice for a fee).


In 2003, Morgan Stanley was fined $50 million by the SEC for pushing clients toward certain mutual funds in order to gain millions of additional dollars in commissions, and without disclosing the incentives to its clients. In 2004, the firm was fined $15 million and censured by the NASD for collecting outsize commissions "far in excess of the typical rate of six cents a share" for allocating shares of initial public offerings (IPOs) to favored clients. With their stock price and public image at rock bottom, Morgan Stanley replaced many of the top executives in its retail division. And in an effort to clean up the firm's public image, its new CEO has changed the name of its retail division to Morgan Stanley Global Wealth Management Group and now calls its stockbrokers "Wealth Advisors."

But are these name changes really fooling anyone? Does the public really care? I think the answer is to both of these questions is "No." But some in the financial planning community are afraid that stockbrokers calling themselves financial advisors will tarnish the name "financial advisor" which organizations like the Financial Planning Association (FPA), the trade group for Certified Financial Planners, and the National Association of Personal Financial Advisors (NAPFA) are trying hard to promote as the most trustworthy name in financial services.

Meeting the public's low expectations
In the wake of having to pay millions of dollars in fines to the SEC and NASD, and to settle numerous class action lawsuits, I remember watching Merrill Lynch's CEO, David Komansky on CNBC talking about the steps his firm was taking to improve its internal regulatory operations and its shareholders? and clients? confidence. What amazed me was how easily he was able to gloss over his firm's well-documented history of unethical activities and how easily he assumed that by announcing a few internal regulatory changes the public would overlook his firm's serious past transgressions. Even more amazing was the fact that he was right. Although Merrill Lynch has since been fined for a slew of illegal and unethical activities, investors continue to do business with the firm.

When Janus Capital Group was charged with allowing market timing and after-hours trading in some of its mutual funds (both illegal activities), I stopped using their mutual funds. I saw no reason to reward Janus or any other firm for unethical behavior by continuing to do business with them. I also believe that we are known by the company we keep, and I did not want to be associated with investment firms known for unethical activities. However, in spite of all the bad press that Janus received, I knew that investors would overlook their past transgressions and flock to their funds as soon as the firm's growth investment style returned to favor and as soon as they had a few hot funds. And I was right.

Investors have been trained by the brokerage industry to have low expectations for their financial advisors and appear to be willing to overlook unethical, even illegal activities by the firms to which they have entrusted their financial assets and their family's financial security if they think those firms can make them money.

Last week, I received a call from a friend whose stockbroker had advised her to invest in a variable annuity - a recommendation she now believes was inappropriate. And in spite of her belief that her broker's recommendation was based in part on his interest in generating a high commission for himself, she's not upset with him and continues to do business with him. When she recently told her broker that she did not think his recommendation had been appropriate and that she had been "stupid" for following it, he replied, "Yea, but look how much money I made you." And although she could invest in any of the funds in her variable annuity in a regular brokerage account for less money (and with fewer restrictions), she's okay with that.

Why is the public okay with being cheated, overcharged and taken advantage of by their financial advisors? Because they don't know the differences between the many types of financial services professionals who call themselves financial advisors. And because they don't think that any one type of financial advisor can be trusted to provide better, more objective, unbiased advice and put the client's interests ahead of their own, they are willing to settle for the status quo.

The Registered Investment Advisor: A better, more ethical type of financial advisor?
Individuals and businesses that provide investment advice for a fee are required to register with the SEC and/or the states in which they do business. These Registered Investment Advisors are regulated by both state laws and the Investment Advisors Act of 1940. Winer Wealth Management, Inc. is a Registered Investment Advisor.

One of the key components of the Investment Advisors Act of 1940 is its stipulation that Registered Investment Advisors (RIAs) have a legal, fiduciary responsibility to act in their clients best interest at all times and in all aspects of their business relationships. RIAs are also legally required to disclose all potential conflicts of interest.

Unlike RIAs, stockbrokers (NASD registered representatives) and insurance agents are NOT subject to a legal requirement to act as a fiduciary and are not required to disclose conflicts of interest. Under what has become known as "The Merrill Lynch Rule," the SEC excludes stockbrokers who offer fee-based accounts from having to become Registered Investment Advisors and from acting as fiduciaries. And in spite of pressure from a number of financial planning organizations, the brokerage industry has fought long and hard to avoid having to register stockbrokers who offer fee-based accounts as RIAs and subjecting them to a fiduciary requirement.

One can't help but wonder why the brokerage industry would not embrace the opportunity to have its stockbrokers (whom they like to refer to as financial advisors) become Registered Investment Advisors, be held to a fiduciary standard and put their clients? interests ahead of their own. The only reasons I can think of are that the brokerage industry has no interest in acting as fiduciaries or putting their clients? interests ahead of their own. They are secure in their belief that clients will overlook the unethical, sometimes illegal manner in which they do business as long as they make their clients money, and even if they don't.

Are Registered Investment Advisors really more ethical and trustworthy? Statistics say YES!

Just because we?re legally required to act as fiduciaries, are Registered Investment Advisors really more ethical than stockbrokers or insurance agents registered with the NASD? According to statistics published in an article in the February 2006 issue of Registered Rep Magazine, it would appear so, and by a margin of more than 10 to 1. According to the article: ?On average, the NASD brings more than 1000 disciplinary actions and cashiers 700 unfit brokers and broker dealers from the industry every year. By comparison, there were (only) 95 civil actions filed in federal court and administrative proceedings against RIAs (including asset managers) in 2005." That's a big difference!

So while not all stockbrokers are unethical and not all RIAs are saints, on average, stockbrokers and insurance agents registered with the NASD have been ten times more likely to act in an unethical manner than Registered Investment Advisors. And it's statistics like those that cause NAPFA and the FPA to become semi-enraged when they see brokerage firms and insurance companies calling their sales force ?financial advisors.? Both NAPFA and the FPA believe that the term financial advisor should be reserved for only those individuals who are Registered Investment Advisors and held to a fiduciary standard.

The FPA sues the SEC over the Merrill Lynch Rule
In 2004, the FPA filed a lawsuit against the SEC in an effort to abolish the Merrill Lynch Rule and require stockbrokers who offer fee-based accounts to register as investment advisors and be held to a fiduciary standard.

A 2004 study by TD Waterhouse concluded that most consumers have no idea of the differences in how professionals who provide financial advice are paid or regulated. Both TD Waterhouse and the FPA believe that brokerage firms have historically been dishonest and deceptive in their dealings with consumers and that the abolition of the Merrill Lynch Rule would serve the best interests of the general public.

Although the SEC upheld the Merrill Lynch Rule in its 2005 final ruling, in an attempt to placate the FPA and better protect consumers, they added additional requirements for broker dealers. Beginning in 2006, broker dealers offering fee-based accounts must now prominently disclose the following:

  • Brokerage accounts are not advisory accounts
  • The brokerage firm's interests may not always be the same as yours
  • You are welcome to ask them questions about your rights and their obligations to you, including the extent of their obligations to disclose conflicts of interest and to act in your best interest
  • They are paid both by you and by people who compensate them based on what you buy

These disclosures were excerpted from the customer disclosure section of the SEC's final rule release No. 34-51523. Although it's a step in the right direction, the SEC's final ruling does not place a legal, fiduciary requirement on brokerage firms and insurance companies to disclose conflicts of interest and act in your best interests at all times. Notice that you are required to ask them about your rights and their obligations, they are not required to disclose them to you. How stupid is that? How many consumers do you think will read the disclosures? How many do you think will ask about their rights? Very few.

Because the FPA does not believe that the SEC's final ruling does enough to protect the general public, they are continuing on with their lawsuit against the SEC and their effort to completely overturn the Merrill Lynch Rule.

Information you need to know
While it's admittedly self-serving for me to explain the many reasons why Registered Investment Advisors like Winer Wealth Management, Inc. are more worthy of your trust than our competitors in the brokerage and insurance industries who also call themselves financial advisors, this is information you need to know to protect yourself from the many wolves in sheep's clothing and the damage that they can do to your wallet, your investment portfolio and your family's financial security.

The brokerage and insurance industries have a long-standing culture that nurtures conflicts of interest, and they appear to have no interest in changing. Their interests revolve solely around offering whatever products and services will provide the firm, its sales force and its shareholders the most money possible. Their clients? interests are clearly secondary.

Beware of your insurance agent?
Although I've been picking on the brokerage industry (for good reasons), the insurance industry is even worse! Not only do you have another long-standing culture that nurtures conflicts of interest and deceptive sales practices, you also have insurance agents who know little or nothing about investing and financial planning running around selling illiquid, highly commissioned investment and insurance products to teachers and little old ladies. Both the NASD and state insurance agencies are currently examining the manner in which insurance agents have been selling equity-indexed annuities, many of which pay upfront commissions between 8% and 10%.

The fact that the insurance industry is more concerned with earning high commissions than looking out for its clients? best interests is not lost on the companies that market products and services to insurance agents. The publications I receive geared to insurance agents are full of ads promoting indexed annuities that pay 8% to 10% commissions and sales systems guaranteed to increase production and generate high commissions. There are very few ads that explain how the advertiser's products and services will benefit the agent's clients. Most are geared to show how their products and services will benefit the agent or commissioned advisor.

By contrast, the publications I receive geared to fee-only or fee-based advisors are full of ads that talk about ways to help the advisor help his or her clients. Instead of talking about commissions, Integrity Life Insurance Company has an ad for ETFs and variable annuities that touts their low costs and diversification benefits. Eaton Vance has an ad that talks about the tax advantages provided by their Tax-Managed Value Fund. And American Skandia and Prudential Financial have an ad that describes their variable annuities as "an intelligent new retirement solution." There is no talk in any of these ads about commissions or fees paid to the advisor.

Tipping Their Hand
I find it both interesting and insightful that when insurance companies place ads in magazines targeted to stockbrokers and insurance agents, they tout their product's high commissions (as if high commissions are a good thing). By contrast, when they place ads in magazines geared to fee only or fee-based advisors (many of whom are Registered Investment Advisors and legally required to act as fiduciaries), they tout the product's benefits to our clients.

Clearly, insurance companies know that most stockbrokers and insurance agents are primarily interested in how much the products and services they sell you will pay them in fees and commissions. Fee-only or fee-based advisors, on the other hand, are primarily interested in products and services that will help them benefit their clients.

You should know that any time your insurance agent or stockbroker receives a commission for a product he or she sells you, their commission is either coming out of your pocket upfront or being paid from higher, ongoing internal fees and expenses. Either way, you are paying the commission.

The insurance industry's dirty little secret
The first insurance policy I ever sold was to my parents for the purpose of paying estate taxes when my parents pass away. Although I was the agent who sold them the policy, my parents had worked with a fee-only advisor who had recommended that they purchase a policy from a highly respected and highly rated insurance company. And as long as someone had to receive a commission for the sale, their fee-only advisor suggested that I get my insurance license so that I could earn the commission. That is how I first got started in insurance.

Although the policy specifications (face value, annual premium, etc.) had been determined by my parents? fee-only advisor, that didn't stop the insurance company general agent from trying to earn me and him higher commissions. He told me, "If you adjust the target premium, you can earn a higher commission. But won't that reduce the amount my brothers and I receive when my parents die?" I asked (knowing the answer). "Not really," he replied. He was lying.

Clearly, it was ignorant and distasteful for the general agent to recommend that I adjust the target premium on my parent's insurance policy. if I had followed his recommendation, I would have been cheating my parents? beneficiaries - my brothers and me! The fact that this general agent who represents one of the most highly-respected insurance companies in the world and advises hundreds of insurance agents could suggest that I might want to rip off my brothers and ultimately short-change myself in order to earn him and me more money in commissions defies common sense.

Yet it happens every day in the insurance business, and exemplifies why the FPA and NAPFA do not want these people to be allowed to call themselves financial advisors.

Here's something else you should know: The numbers in any whole life or universal life insurance policy illustration can be manipulated to do anything the insurance company or insurance agent wants them to do, including generating higher commissions. Buyer beware!

Of course, not everyone who sells insurance is unethical. The insurance agents I work with on a daily basis, and whom I have chosen to work with my clients and me on more complex insurance cases were chosen for their experience and their integrity. And as a Registered Investment Advisor, my fiduciary responsibility to act in my clients? best interest at all times and in all aspects of our relationship applies to my business as a licensed insurance agent.

Once again, I believe we are known by the company we keep, and I will only work with the best, most ethical legal and financial professionals. And those are the only kinds of professionals whose services I will recommend to my clients.

What makes a "great" investment?
When selecting investments for my client's portfolios, I look for experienced money managers who have delivered consistent, exceptional performance relative to their peers with an appropriate level of risk or volatility over a number of different time periods and economic environments. I look for money managers who are independent thinkers, who utilize intelligently designed, disciplined investment strategies. I suppose you could consider the investments I select for my clients? portfolios based on these criteria to be "great" investments. However, many commissioned stockbrokers and insurance agents have a different idea of what constitutes a "great" investment.

A few years ago, I attended a small investment conference in Salt Lake City. Out of 50 attendees, I was the only financial advisor who was not affiliated with an NASD brokerage firm. One night at dinner, one of the advisors at my table began a conversation by saying, "I've got a great investment I want to tell you about." As you can imagine, I was interested in hearing what he had to say because I am always on the lookout for "great" investments. The advisor continued, "It's the Evergreen XYZ Fund (I don't recall the specific name of the fund). It pays a 6% commission upfront and has a 3% annual trailer."

That was it. That was his "great" investment: a mutual fund that paid a high commission. And if you?re as disgusted as I was at how this person who called himself a financial advisor described a "great" investment and how the others at the table agreed, you?ll be relieved to know that he went on to say, "Oh yea, and it's got a pretty good track record, too."

Sadly, an investment that pays a high commission (even a mediocre investment) is what many in the brokerage and insurance industries consider to be a "great" investment.

NAPFA criticizes Smith Barney for abusing the term "financial advisor."
Organizations like NAPFA and the FPA are on a crusade to educate consumers about the differences between fee-only and fee-based Registered Investment Advisors and the stockbrokers, bankers and insurance agents who call themselves financial advisors. They want the public to know that Registered Investment Advisors are the only financial advisors who have a legal, fiduciary responsibility to act in their clients? best interest at all times and in all aspects of their relationship, and to fully disclose all conflicts of interest. They are also fighting to make it harder for banks, brokerage firms and insurance companies to be able to call their brokers and agents who offer fee-based accounts financial advisors without being held to the same fiduciary standard as Registered Investment Advisors.

The term "financial advisor" should be reserved for professionals who give objective financial advice and who always put the interests of their clients first," says Peggy Cabaniss, NAPFA chair. "It should not be co-opted by salespeople whose only loyalty, both financially and legally, is to their employer." Cabaniss argues that the SEC is turning a blind eye to a growing problem. "The Securities and Exchange Commission recognizes that brokers are not the same as financial advisors. That's why the SEC holds financial advisors to higher standards and why NAPFA supports raising standards," she says. "However, when we and other associations point out to the SEC that brokers are calling themselves `advisors,? the SEC turns a deaf ear. Smith Barney appears to be the latest company to jump through the loophole that the SEC has created."

Forewarned is forearmed
Hopefully, you now have a better understanding of the key differences between the many types of financial services professionals who call themselves financial advisors. Some are truly dedicated to looking out for your and your family's financial interests. Others, however, are merely interested in selling you financial products and services that will pay them high commissions. Often, it's hard to tell them apart. And while not every individual who calls himself or herself a financial advisor is experienced, ethical and worthy or your trust, those of us who are Registered Investment Advisors have a legal, fiduciary requirement to act in your best interest at all times.

As a financial advisor, I believe that there is nothing more sacred than the trust my clients have placed in me to help them make the best, most appropriate personal and financial decisions, manage their investments and personal finances effectively and to ensure their family's long-term financial security and independence.
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