With the U.S. Department of Labor pumping the breaks on its fiduciary rule for financial advisors, investors may be once again vulnerable to unethical money managers who don’t have their best interests in mind.
In general, studies show that Americans are generally happy with their financial advisors, as a recent J.D. Power study reports.
But with the industry in flux over the rise of so-called “robotics advisors” and more consumers going the do-it-yourself route, using newly-developed and user-friendly money management apps and technologies, it doesn’t take too much for a customer to leave his or her financial advisor.
With advisory relationships with consumers at risk, you’d wonder why any financial professional would take liberties with their customers. Yet too many do.
[See: 9 Psychologicial Biases That Hurt Investors.]
PBS cites a 2016 report from the University of Minnesota that shows 7 percent of money managers have been disciplined for fraud disputes or other form of misconduct. In addition, 38 percent of that 7 percent figure were deemed “repeat offenders.”
Sure, the vast majority of financial advisors are ethical, efficient and transparent in their dealings with their customers. But tell that to those consumers who feel they’ve been misled or even fleeced by their money manager.
So how would clients know if they’re getting a raw deal from their advisor? These five “red flags” lead the way.
Your advisor isn’t a fiduciary. David Rae, a money manager with Trilogy Financial Services in Los Angeles, says the first question to ask your adviser is, are you a fiduciary? “If they give you anything but a resounding ‘yes,’ run and run quickly,” he says.
“A red flag that your adviser isn’t a fiduciary is if they have you sign a best interest contract agreement or a best interest contract exemption agreement, essentially relieving them of fiduciary duty,” he adds. “If they don’t have some great reason for this exemption other than they want a big commission, it may be time to find a new advisor.”
Your advisor gives you complex explanations. “Some financial advisors make personal finance and financial planning sound complex, so you feel you’ll always need them and won’t be able to manage your money on your own,” says Roger Ma, a certified financial planner and founder of New York-based LifeLaidOut.com. “Good financial advisors will simplify financial concepts rather than complicate them, to make sure you fully understand basic concepts and your options.”
Your advisor is always using high-cost mutual funds. “At a time when investors can buy the S&P 500 for 0.05 percent through an index fund or exchange-traded fund, there are still many mutual funds sporting management fees in excess of 1 percent,” says Kevin Feldman, founder of Feldman Capital, a money management firm based in San Francisco.
[See: 8 Ways President Trump Will Affect Wall Street.]
Feldman also advises financial consumers to watch out for the use of private funds and non-publicly traded real estate investment trusts. “These are complex and often illiquid products that also tend to carry an assortment of high fees, sometimes as upfront sales charges and other times as redemption fees,” he says.
Your advisor won’t tell you how he or she is paid. Ask your advisor to put in writing how they are paid, from whom they are paid and how much, says Matt Ahrens, a fee-only financial advisor with Integrity Advisory Group in Overland Park, Kansas.
“I’ve had so many clients come in my office saying their advisor told them they weren’t being charged a management fee, but when I look at their statement they are in a C-share mutual fund,” he says. “Clients don’t know the intricacies of these fees so the advisor has to be upfront about it.”
Your advisor views you as a fee machine. Judy McNary, a certified financial planner at Confluence Financial Advisors in Boulder, Colorado, says a key red flag are varying fund fee charges that can really add up.
“Certain brokerage firms use, or more likely, abuse the different share classes of mutual funds,” she says. “One practice I really despise is when they put the A share class of a fund in a client’s taxable brokerage account and the C class share in the client’s tax-free Roth IRA account.”
In doing so, the advisor earns a 5.75 percent commission (front-loaded) on the A share and then they receive a lower but ongoing commission on the C share.
“By putting the C shares in the Roth account they are creating for themselves a long revenue stream that is not in the client’s best interest,” McNary says. “If you see this in your investment accounts, you don’t have a financial advisor, you have a sales person. My recommendation would be to seek out a fee-only financial advisory who, as a fiduciary, will put client interests before his or her own.”
If you believe your financial advisor is guilty of any (or even all) of the above transgressions, speak up and address the issue directly. If you’re not satisfied with the explanation you’re getting, it’s time to move to a new money manager.
[See: 10 ETFs That Pay Sky-High Dividends.]
The sooner the better.
More from U.S. News
The 7 Best Bank Stocks to Buy for 2017
7 of the Best Stocks to Buy for 2017
7 of the Worst Stocks to Buy for 2017
5 Signs You’re Getting a Raw Deal From Your Financial Advisor originally appeared on usnews.com
