Lower-quality advisors deceive investors for four reasons. 1)
They cannot compete with higher quality advisors if they tell the truth. 2) Investors will not buy what they are selling if they tell the truth. 3) Current clients will terminate them if they tell the truth. 4) They make more money if they use deceptive sales practices.
There are three primary forms of deception: omission, misrepresentation, and exaggeration. All three violate industry regulations that require advisors to tell investors the truth when they sell investment advice and products. However, these regulations do not protect investors, because companies pay lip service to existing regulations and spend millions fighting new ones that would require full disclosure. In addition, deceptive information is often verbal, so investors have no record of what was said to them, regulatory agencies have no control over what is said to investors, and it is the investors' word against advisors' if there is a dispute.
One of investors' biggest risks is what advisors don't tell them. This is an easy one for advisors because there is no way for investors to know what they don't know. For example, advisors neglect to tell investors:
- They are new to the industry -- and three months ago they were selling cars.
- They have numerous complaints on their compliance records.
- Their investment recommendations are performing poorly.
- Investors are paying more than 3% in annual expenses.
This form of deception is more flagrant, because it is lying. It is also an easy form of deception for advisors who are willing to lie to make money. It's easy because investors assume advisors they like are telling the truth. Examples of misrepresentation include:
- Advisors claim they are investment experts when it is not true.
- Advisors buy bogus credentials so they look more knowledgeable than they really are.
- Sales reps pass themselves off as financial planners.
- Advisors claim they selected high-performing mutual funds before the performance occurred.
The third form of deception occurs when advisors exaggerate information that helps them sell investment products. They provide no proof for these claims.
- They say their current clients have received exceptional returns.
- They say they are in the top 10% of local advisors.
- They say they produce high returns for low risk.
- They say they service large numbers of clients with substantial assets.
What is the solution? You can assume Wall Street is not going to solve the problem of deceptive sales practices. We already know they fight new regulations that would fix the problem. You can also assume regulatory agencies have no way to control what is said to investors. That leaves you!
You could record your conversations with advisors, but a simpler solution is documentation. Disregard information that is delivered in sales pitches. Only accept information that is documented by advisors.
This is the process pension plans use when trustees select financial advisors. You will receive more accurate information, and you will have a permanent record of what was said to you. It is no longer your word against the word of the advisor.
If you don't have a process for obtaining written information, go to www.InvestorWatchdog.com, and use one of its services that gathers factual information from advisors. Watchdog also acts as your record-keeper by storing advisor responses for you. Both services are free to investors.
— Jack Waymire spent 28 years in the financial services industry, and for 21 of those years, he was the president of a registered investment advisory firm. He left the industry in 2004 for a career as an author and blogger. You can reach him at Jack@InvestorWatchdog.com.