This week I had two referrals that prompted this post.  In each case, I was asked to provide a pre-investment suitability analysis for fiduciaries involved in the cases.  One case involved a trust for two children whose parents had died.  The other case involved a widow who has inherited a significant sum from her husband’s estate.

In both cases the parties were given so-called “asset allocation” plans with the obligatory multi-color pie charts and recommendations for the purchase of both a large variable annuity and substantial equity investments. Both cases were perfect examples of the “weasel” rule. 

And people wonder why I fight so hard for a universal fiduciary standard for anyone providing investment advice.  Whether it is a case of ignorance or greed and dishonesty, these parties could have been seriously harmed by such careless advice had they actually followed the adviser’s recommendations.

I always advise investors to take a financial adviser’s advice and then ask both themselves and the adviser – “Why?”  Far too often advisers “fail to see the forest for the trees,” focusing on the theoretical issues instead of practical and honest real world solutions . 

The children’s inheritance represents all of the money they have, at least for the time being.   While capital preservation is an obvious issue, recommending a variable annuity for children…really? And I am sure that some compliance officer or branch manager would have approved it.  Furthermore, the equity products were primarily proprietary funds with high commissions, high annual fees and historically poor performance.  The children and the grandparents did not know to ask “why,” so I did.   

The widow’s husband had invested wisely and their portfolio provided sufficient income to cover their living expenses.  That being the case, the recommendations for a variable annuity and  equity funds would have served no purpose other than to provide the “adviser” and his company with a financial windfall at the widow’s expense.  While the inheritance created a need for some advanced estate planning, the portfolio she inherited met her current needs.  As in many marriages, the widow’s husband had handled all the financial matters, so she was uncomfortable asking “why?”

Unfortunately, this happens all too often, especially with widows, children, and the elderly.  In many cases, the reluctance to ask “why” is due to what is known in psychological circles as the “truth”, or “trust,” bias, a situation where someone defers to a someone’s apparent authority or expertise.  Far too often the speaker has no expertise whatsoever, but is simply a salesmen trying to make a sale.  A study by CEG Worldwide estimated that 96 percent of those holding themselves out as wealth managers and advisers were nothing more than product salesmen.

So whenever a “financial adviser” offers you “investment advice,” hand the pretty little multi-color pie charts back to them and ask him/her “why.”  Then ask them to redo the asset allocation numbers using the actual products they have recommended to show you how their recommendations would benefit you as opposed to them. (Note – It can be done with an Excel spreadsheet program. However, many advisers cannot do this with their software, so then how do they know their recommendations are actually in your best interests?).  Then tell them to “fuhgeddaboutit” and walk away.

As a securities attorney and a former securities compliance officer, I can assure you that it is far more beneficial and less stressful to avoid investing in unsuitable investment in the first place than it is to try to recover unnecessary financial losses in the courts or through arbitration.