The Power of the Proactive Investor, Part One

“Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you under-stand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits and our salesperson’s compensation, may vary by product and over time.”

The foregoing disclosure was part of a rule enacted by the Securities and Exchange Commission (“SEC”) in an effort to address an ongoing dispute about the disparity of standards for stockbrokers and investment advisers. The Financial Planning Association sued the SEC over the disparity and won, with the court striking down the rule and requiring that stockbrokers charging fees for investment advice register as an investment adviser.

The long-needed disclosure finally made the conflict of interests regarding stockbrokers very clear to investors. An SEC commissioned study by the Rand Corporation revealed that an alarmingly high percentage of investors mistakenly believed that it was stockbrokers, not investment advisers, who owed clients a fiduciary duty. A TD Ameritrade study resulted in similar findings. And yet the SEC did not require stockbrokers to continue to disclose the conflict of interests issue.

The recently passed Dodd-Franks Act included provisions which would allow the SEC to enact a universal fiduciary standard that would apply to anyone providing investment advice to the public. It is hard to see how anyone could legitimately argue against such a common sense requirement, as it furthers the express intent of the federal securities laws and the expressed purpose of the SEC, namely to protect investors. And yet Congress continues to stall and delay implementation of a universal fiduciary standard, even suggesting that yet another study should be done.

In an effort to help Congress and save taxpayers’ money, I conducted an informal survey of 210 people based on the following question – At the present time, investment advisers are required to always put a client’s interest first, but stockbrokers are allowed to put their own personal and financial interests ahead of their clients’ interests. Do you feel that anyone providing investment advice to the public should always be required to disclose any actual or potential conflicts of interest and always put their clients’ interest first? Of the 210 people polled, 100% answered in the affirmative, with many expressing surprise that this situation even existed. You are welcome Congress.

The SEC’s failure to continue to require the conflicts of interest disclosure for regular brokerage accounts highlights the need for investors to be proactive in managing their investment accounts. Not all stockbrokers are dishonest and not all investment advisers are honest. A healthy dose of skepticism never hurts. That being said, based upon my experience as a former compliance officer and a current CFP® professional, Accredited Wealth Management Professional™ and attorney, I offer the following proactive strategies.

1. Always keep copies of all forms and documents that are filled out and/or signed. Documents have been known to disappear or change when questions come up.

2. Never sign blank documents and leave it to someone else to fill the document in.

3. Never give anyone discretionary control over investment accounts. Abuse of discretion is one of the leading complaints regarding stockbrokers and investment advisors. The potential risks simply outweigh any alleged benefit. If an investor is asked to sign a trading authorization so that a brokerage firm can accept orders from the investor’s broker or advisor, the investor should write “NO DISCRETION” on the form to avoid any confusion as to the power being authorized.

4. Read all account statements and correspondence received from a brokerage firm, a broker or an advisor. If wrongdoing is going on in an account and is reflected in the account statements or correspondence, failure to promptly notify the brokerage firm and to object to such questionable activity may prevent an investor from recovering any losses resulting from such activity.

5. Ask questions. Ask why certain investments are being recommended. Ask whether a purchase of a recommended investment product would result in a commission for the broker or the advisor making the recommendation and, if so, what the amount of the commission would be. Ask whether the recommended investment product is a proprietary product of the company that the broker or the advisor is affiliated with and, if so, ask whether the broker or the advisor can recommend similar non-proprietary products. Ask whether the recommended product has ongoing fees and, if so, how much those fees are. Even if an investor is turning the management of their investment account over to a money manager, the investor should continually ask questions in order to protect against losses due to “black box” asset allocation.

6. Consider all aspects of an investment. Some investors only look at the historical or projected return of an investment before making an investment decision. Investors should always consider factors such as the risk/volatility of an investment, the fees associated with an investment, and the tax aspects of an investment. This is particularly true when considering the purchase of an annuity.

7. Be alert to brokers and advisors possibly “working their book.” When business is slow, brokers and advisors may be advised to “work their book.” This may explain unexpected phone calls suggesting that an investor review their investment portfolio and reallocate their assets, switch mutual funds to buy funds from a different fund family, or perform an annuity exchange.

It is illegal for a broker or an investment advisor to make investment recommendations for the purpose of generating commissions. Certain practices should raise red flags for investors. Recommendations that an investor sell funds of one mutual fund company and buy the same or similar type funds of another mutual fund company should be questioned. Recommendations that an investor sell funds of one mutual fund company and buy different types of funds from another mutual fund company should be questioned if the original mutual fund company offers the same or similar type funds as those being recommended, as most mutual fund companies allow an investor to make internal fund exchanges without incurring new commissions.

Recommendations that an investor exchange one annuity for another annuity should always be questioned since the exchange will result in new commissions for the broker or the advisor.

Recommending that an annuity owner exchange annuities is especially suspicious when the current annuity is still subject to surrender charges, as the client would lose money as a result of having to pay surrender charges for the exchange. An investor who becomes aware of such practices should promptly notify the appropriate regulatory organizations.

8. Don’t be lulled into a false sense of security by an advisor’s credentials or designations. The number of letters after an advisor’s name does not ensure the skill or the integrity of the advisor. The most widely respected and recognized designation in the financial planning industry is the CFP designation conferred by the CFP Board of Standards. The CFP designation signifies that an individual has a certain level of experience in financial planning, has completed an extensive examination, and has complied with continuing education requirements.

Always ask for both Parts I and II, and all schedules, especially Schedule F, of an investment advisor’s Form ADV. Take the time to read the material to find out about the planner’s background and qualifications. Although registered investment advisors are allowed to use a disclosure brochure instead of their Form ADV, insist on the investment advisor’s Form ADV. Many disclosure brochures are nothing more than glorified marketing brochures, while the Form ADV contains the information the investment advisor filed with regulatory officials. Also check the planner’s records at the NASD’s web site (

© 2011 InvestSense, LLC. All rights reserved.

The information provided in this post is not designed or intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances. If legal, investment, or other professional assistance is needed, the services of an attorney or other professional advisor should be sought.

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1 Response to The Power of the Proactive Investor, Part One

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