By H. William Wolfson, DC, MS, MPASSM, CFP®
Less than 50 percent of the U.S. population consult and hire a financial consultant. There is a myriad of answers for why this may be. Those who do work with a financial professional have an expectation of certain results. If the goals are realistic and not achieved within a given time period, a client should obtain a clear explanation as to why discussed benchmarks were not reached. Additionally, a planner should convey concise and easily understood explanations of any suggested changes going forward. There are times where nothing should be done. Open communication is an essential part of the financial planning process.
The first step is to determine what an investor wants to achieve upon engaging with a financial professional. What are the perceived and expected needs to be accomplished and in what timeframe? The next step is finding someone to work with to attain goals.
Investors could begin by asking a family member or friend for a referral. Others may ask a similarly financially situated person for their recommendation. One can always do an Internet search and read comments—pros and cons.
You can also visit the Certified Financial Planning Board of Standards, Inc. online for more information. Through online tools, the opportunity to review a financial advisor or a broker before engaging in any financial relationship is easily available.
Yoni Youngwirth of Investment News recently wrote, “Ensembles with multiple generations of advisers are a good starting place. Firms that embrace technology to the maximum will be the norm. Advisers who deliver both financial planning and investment performance are a must. Growing, diverse firms need to become common. … Some advisers see what's going on but ignore the trends. Others don't see the industry shifts.”
After mutually deciding to engage in investment management with the selected advisor, the client receives the ADV. This customized brochure “delineates what services are rendered within what parameters of the agreed engagement and outlines if potential conflicts may exist with the advisor rendering these services.” Once all appropriate paperwork is signed and processed, the financial engagement commences. The ADV, although written in “plain English,” can be a cumbersome agreement for clients to fully and clearly understand. More troubling is the realization that a client’s expectation may not necessarily align with the services rendered.
An ADV can outline a fiduciary advisor rendering services simultaneously as a fiduciary as well as rendering services that may not fall under the fiduciary umbrella. Delineating which “hat is worn at which time” can be daunting and at times indistinguishable. However, advisors and others in the financial arena answer to an overseeing supervisory compliance officer. It is the compliance officer’s responsibility to ensure that rules are followed at all times and gray areas of engagement are avoided. This is a tremendous responsibility that is not taken lightly.
Financial advisors and their employers are theoretically always under the scrutiny of agencies such as the Securities & Exchange Commission (SEC), FINRA and others. Financial companies and their employees can be subject to disciplinary sanctions that include warnings, fines, suspension, termination and imprisonment. Despite this overshadowing, there are instances where compliance management oversight misses the mark of holding staff accountable and investors stand to lose. Depending on the financial company’s operation, i.e. Registered Investment Advisor or Broker-Dealer, a compliance officer may answer to someone acting within the Office of Supervisory Jurisdiction (OSJ).
Putting Clients Needs First
What if the system does not work as expected? Let’s examine an example that outlines the conundrum of whether the advisor puts your needs or theirs first. To set the stage: a senior-aged widow engages the services of a fiduciary advisor. The widow owns stocks and her mutual fund positions are both within and outside her retirement accounts. The financial provider does not wish to manage the client’s extensive stock holdings. The client instructs the advisor that certain stock legacy shares are not to be traded. Instead of managing the assets himself, the advisor seeks the assistance of an expert management team and outsources the management. This was the only company suggested and no other options were presented to the widow. The advisor is acting as a solicitor for said management team, where the advisor is paid a percentage of the quarterly fee charged to the client. A solicitor should not offer any financial advice and is a conduit for bringing the client and stock management company together. Seems simple enough, but in reality problems can develop.
What Can Go Wrong?
The stock management company begins to trade the client’s portfolio to meet the level of her risk selected. After numerous trades of the stock position, and continual loses, the client questions the transactions and resulting loses. The advisor, during their quarterly calls, explains to the client that losses can be expected given market turbulence and that time is needed to see the positive results expected. After continual trades and more losses, the client requests a conference call with the advisor and stock managers. What came to light was that the legacy shares that were never to be traded remained in the account and the stock managers were charging a management fee for stocks they were not trading or watching. It was explained by the management team that these legacy shares should have been removed before entering into the financial relationship with their company.
The advisor was aware of this scenario and never informed the client or offered to remove the legacy shares before engaging in the financial relationship with the stock managers. The advisor was collecting a fee as a solicitor that included the unmanaged stocks. The client was horrified that the fiduciary advisor may not have fulfilled his fiduciary duty in “putting the client’s interest first.” At a minimum, the advisor should have ensured the client was not inadvertently being charged for services not rendered or needed, i.e., legacy stocks. It was apparent that the gray line was crossed at the client’s expense with the advisor acting as an advocate for the stock management company. To add insult to an already deplorable situation, the client requested the stock managers perform an analysis of her original stock position and its current value. They determined that her original position did better with no trading vs. the stock managers performing all their trades.
Lack of Supervisory Oversight
More unsettling were emails sent by the client to the advisor, explaining her concerns, that were also copied to the advisor’s financial firm; however, at no time did anyone at the firm reach out to the client. Where was the oversight supervision, as this was going on for almost one year? The client requested and received fees paid for the unmanaged stocks from the stock management company. Subsequently, she disassociated herself from the stock management company and wrote an email to the advisor and firm discharging them from service. The firm’s compliance officer, the advisor nor the OSJ ever reached out to the client.
Honest mistakes do occur and are easily corrected if caught early. Other times, investors have been taken advantage of because of unscrupulous financial providers who do not always act in the best interest of the client. This responsibility remains incumbent on the compliance officer, or OSJ, in charge to oversee and differentiate between innocuous vs. nefarious activities. The question that presents is: Who is watching the watchers?
What can an investor do to prevent potential misunderstandings and avoid problems from developing? An important step is to timely review all statements and correspondence received. Verbal communication is important, but it is subject to poor recollection of what was discussed. What’s more, verbal communication, unless recorded, is subject to a you/they said scenario. Unfortunately, without corroborating objective or written documentation, a client stands to lose. It remains imperative that oral communication be documented by the financial provider or you. More important, review the synopsis of the conversation to ensure its accuracy and comprehensiveness, the action steps identified and the anticipated conclusion. If incorrect, make the necessary corrections to the synopsis and have both parties agree to the changes. A rule to remember: If it was not written down, it didn’t happen. A paper trail is not only for your protection, but for the financial provider’s as well.
Friendly conversation and collegiality at social functions between a financial advisor and a client is fine as long as the professional relationship is not breached. Being friendly does not make a friend. Being a friend does not mean a client can’t be fooled or financially devastated by a less-than-thorough—or worse, an unethical or incompetent—financial provider.
It’s your money. You should never forget the importance of keeping it safe and hiring those who you have carefully vetted, interviewed and expect to be thorough, objective, reachable and have your best interests at the forefront of every action—always.
H. William (Bill) Wolfson, DC, MS, MPASSM, CFP®, is a financial consultant and advisor. Dr. Wolfson retired after 27 years of active practice. Dr. Wolfson can be reached at (631) 486-2792 or email@example.com. View more published articles here.