Trust

I recently read an “Investment News” article¹ about a financial advisor’s ongoing saga with the Securities Exchange Commission (SEC). Like many before her, she appeared to be a casualty of her own pride and greed.

In an arbitration claim, she was accused by a former client of “turning over” [the process of buying and selling securities] his account 20 times in a 43-month period, leading to more than $671,000 in commissions, fees and margin interest on an account that had an average value of $827,000! In another case brought against her by an 86-year old, former GE executive, the advisor was accused of driving down his $25.9-million-dollar initial investment to $8.3 million in the first year. What’s even crazier is that he gave her that $25.9 million dollars in the spring of 2009. That was the bottom of the stock market. It was all uphill from that point!

The SEC is also accusing her of a few other things, including gross misrepresentation. She apparently overinflated her assets under management (AUM), as well as her investment return performance. But before her problems began with the SEC, she was recognized as one of the top advisors in the country by some of the most well-respected financial magazines. She even had her own radio show. Because of this reputation, people trusted her.

After reading this article and recently meeting a local couple here in Doral, FL, I felt a need to write my first blog.

The couple I met found me on LPL Financial’s website. They are local tennis instructors in their early 50’s, who raised three highly successful girls. Their focus now was on their retirement goal. They had worked with another advisor who they met at local bank. The advisor invested the husband’s entire $20,0000 IRA.  Now, if he had made a commission and invested their money in a more appropriate type of investment, well then, I would say that at least he did his job. In my opinion, he didn’t.

When you work with someone who is going to help you invest your money and charge you for it, then you should ask two major questions:

• Are you a broker or are you an investment advisor representative?
• Do you work on commission or are you fee-only/fee-based?

I can bore you with the details, but the bottom line is you want to ultimately work with an investment advisor representative, who is either fee-only or fee-based.² I am not saying that all commission-based brokers are not working in your best interest, but the fact is that the “set up” simply creates a conflict of interest.

Let’s say I gave you $1,000 dollars, and told you to go out and make me some money, but didn’t set any guidelines. How motivated would you be to make sure you came back the next year with more than $1,000?

However, let’s say I told you I would pay you 1% per year for “managing my money,” and it was agreed that you could not compensate yourself in any other way (or, in other words, the investments could not provide you a commission). In the latter example, you would certainly be more motivated to make my money grow, would you not? If I’m paying you a percentage of the money you manage, then it would start at $10 (1% of 1,000), but immediately change up or down, depending on whether you made the balance go up or down. Let’s say you managed to make my money grow to a million dollars, your annual income would grow to $10,000 per year.

On the other hand, if you are a broker, you would only make money on the “trades,” that is, on the investments you bought and sold. So, regardless of whether the balance went up or down, the commissioned-based broker would make the same amount of money. Now, if the broker was smart, he would try to keep you happy and simply trade when necessary.

With an investment advisory representative earning a fee to manage your money, their main incentive is be to implement sound strategic investment approaches. Since your goals are completely aligned, you both want to see your money grow. If he’s a good, experienced advisor, he’ll select low-cost investments with long-term (10 years or more) track records.

The academic research shows that doing financial planning and investing on your own can lead to really bad results.

My advice: Overcome your fears, but don’t go in without some basic knowledge. Remember no advisor can work miracles. If they could, then they’d already be retired themselves. Your portfolio will go down at times, but if it’s in line with your agreed upon benchmark, then don’t over-react or prematurely lose faith in the long-term strategy you and your advisor agreed upon. If your advisor is staying disciplined, then you should as well. If he’s not, then it’s time to ask questions. Beyond that, all I can say is, I hope you find someone that lives up to your initial trust.

by Frank del Busto, CFP, ChFC LPL Financial Investment Advisor Representative

1. “InvestmentNews” The SEC vs. Dawn J. Bennett, July 11-15, 2016 Issue

2. See our website’s “Contact Page” for an explanation on the difference between fee-only and fee-based.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. No strategy assures success or protects against loss.