Navigating Bad Financial Advice

It is absolutely, positively nuts, but investors let financial advisors dominate relationships and decisions that will determine when they retire, their standards of living during retirement, and their financial security late in their lives. What could be more important than the achievement of these goals?

No problem if the advisor is the next Peter Lynch. But that is generally not what is happening out there. Every year, millions of investors turn their assets over to advisors who should be serving as tellers at small, rural banks. They have no business telling people how to invest their assets, in particular their retirement assets.

Actually, it might be a stretch to assume these advisors could make accurate change as tellers without keeping a small percentage for themselves. Six months ago, a number of these financial "experts" could have been selling used cars at Big Al's Emporium. There they might sell people a lemon, but they weren't destroying their dreams of comfortable, secure retirements. The problem is they can make more money selling financial products.

Slick sales representatives who make grandiose statements about their expertise and performance dominate investors -- and crush their dreams. Most advisor pitches sound the same because all of the claims are based on the same sales ideology: Tell people what they want to hear. Advisors tell investors that they are trustworthy financial experts who always put investor interests first. Why investors don't see past the pitches is beyond me.

Maybe this is the answer: These same investors believe the advisors are their friends. The investor got a free lunch, and the advisor made thousands of dollars selling financial products. Sounds like an expensive lunch to me.

Apparently, investors have a hard time believing so-called friends will take advantage of them for money. Apparently they missed the headlines that described the tactics of Bernie Madoff and Allen Stanford. Atypical cases? I don't think so. Madoff and Stanford were slicker than your average con artist, and their clients thought they were friends.

Why are investors so naïve? Because everyone wants to believe. Go ahead and give your assets to the nice, friendly advisor at Goldman Sachs. The investor doesn't bother to do any due diligence because, hey, the financial advisor works for Goldman Sachs -- a prestigious firm that would never take advantage of its clients to make bigger incomes, bonuses, and profits. Or would it?

The bottom line is that investors are naïve and just too busy to research advisors and firms before they commit their future financial security. So how about a simple, easy-to-implement solution that could reduce the risk of selecting the wrong advisor by about 50 percent? All investors have to do is start requiring advisors to document information that impacts their competence, ethics, business practices, results, and expenses. In fact, advisors should be required to document any information that is going to have an impact on investor decision-making.

How do I know documentation is a powerful tool for investors? It must be powerful because Wall Street spends millions fighting any form of mandatory disclosure. And low-quality advisors hate it. They prefer verbal sales pitches that maximize the impact of their personalities, sales skills, and relationship skills. They can say just about whatever they want because investors have no written record of what was said to them. They can claim they are CFPs and Harvard MBAs and deny it all later. If there is a dispute, investors lose because they have no evidence of any wrongdoing.

Let's assume less ethical advisors don't mind lying to win assets and make more money. In fact, I believe they have to lie some of the time to compete with higher-quality advisors who really are CFPs and Harvard MBAs. But, lying in print is a whole different ball of wax. Now investors have evidence they were lied to. They can turn their evidence over to attorneys, company compliance officers, and regulatory agencies -- and bad advisors know it. Perhaps it is safer to use their deceptive sales tactics on investors who don't require documentation.

The information advisors are willing to document is a lot more accurate than sales claims and pitches that can be denied later. Investors should demand written information so they select the right advisors and make the right decisions when they evaluate current advisors.

There is a major irony. Advisors will not enter into agreements with investors without a written document. The document is totally self-serving, but it is a document. Investors should have their own documents that protect them from advisors who cheat to win.

Follow this old adage and you'll have more money later: "Trust what you see, not what you hear!" Nothing could be truer when you interact with representatives of Wall Street interests.