What to Do When Your Advisor Messes Up
PLANNING FOR YOUR financial future requires attention to detail, which is why you should choose an investment or financial advisor carefully, but even the best advisors can make mistakes, with a truly unscrupulous advisor potentially costing you your retirement.
Considering the overwhelming number and variety of financial professionals to turn to, investors are bound to encounter a bad apple, or at least an inferior one, now and then. “There are over 300,000 advisors in this country and not all of them are equal,” says Geof Brown, CEO of the National Association of Personal Financial Advisors, a professional group for fee-only financial planners. To that number, you can also add the more than 630,000 investment brokers with 3,700 securities firms, according to the Financial Industry Regulatory Authority.
Different rules for different financial professionals only add to the confusion. Many financial professionals must adhere to a set of overlapping ethics, training requirements and rules, especially if they are members of organizations like the National Association of Personal Finance Advisors or the Certified Financial Planner board, Brown says. Investment brokers, meanwhile, must be licensed by the Securities and Exchange Commission to buy and sell stocks and bonds. Only advisors with the letters RIA after their names are registered investment advisors and are registered with the SEC or a state securities regulatory agency. An advisor registered with a regulating agency is held to the fiduciary standard of acting in your best interest, while others are held simply to a suitability standard, Brown says.
Regulated or not, a financial professional whose actions raise an alarm bell shouldn’t be left unchallenged. In fact, your best defense is to ask questions, lots of them, including who has custody or authority over the investments or products you buy. “Does the advisor have custody, or is the custodian a highly rated financial institution?” says Erika Jensen, founder of Respire Wealth Management in Houston. Many of the worst Ponzi schemes were perpetrated by advisors who had custody of clients’ investments, although not all advisor-custodian arrangements are scams, she says. If you believe an individual has breached a fiduciary responsibility or engaged in unethical behavior that could put your savings at risk, here’s what financial experts say you should do.
Know the red flags. Potential misconduct from advisors can range from unintentional or careless mistakes, such as misunderstanding a client’s trade instruction, to stealing outright from a customer’s account. “Most incidents of misconduct fall somewhere in the middle and involve issues such as misrepresenting or omitting facts in connection with the sale of a security, recommending unsuitable investments, churning, unauthorized trading, or generally failing to act in the best interests of the customer,” says Lance McCardle, an attorney partner at Fishman Haygood in New Orleans who has been representing investors in claims against their brokers and financial advisors for 12 years.
For example, “churning” is a high volume of trading that would indicate an attempt to generate more commissions. Other problems may include advisors who recommend at their customers’ expense investments that pay high commissions, most commonly non-traded REITs, limited partnership interests, private equity deals, annuities, insurance, oil and gas investments, and certain mutual or hedge funds, McCardle says. An advisor’s recommendation should fit a client’s particular risk tolerance profile, goals and overall suitability and not be dictated by what makes the advisor the most money.
Unrealistic promises are also suspicious. “If your advisor has led you to believe that your returns are fixed or guaranteed in some way, you should be very wary of such investments,” he says.
The same is true for an advisor who promises to deliver something that others couldn’t. “Beware of advisors who engage in the process of cherry picking,” Jensen says. “This is where an adviser takes your existing investments and runs an illustration that shows his or her investment strategy would have outperformed your existing investment strategy.”
Another red flag is a broker or adviser who suggests that he can help you become eligible to buy a certain investment. If someone is selling you an investment that you would not have otherwise been able to buy, you should ask how that is possible. If the advisor is generating summaries of your investment holdings and returns but the customer either cannot understand them or can’t verify them, that can also indicate misconduct, McCardle says.
An advisor who doesn’t return your phone calls or emails may be avoiding having to explain or discuss a problematic investment that he sold you, McCardle says.
Take appropriate action when necessary. Just as there are varying degrees of misconduct, there are also varying degrees of remedy. “A financial advisor is a person of great trust and responsibility and should act in that manner,” says Dennis LaVoy, certified financial planner with Telos Financial in Plymouth, Michigan. “The ramifications for an advisor giving misleading advice depend on the degree of the violation and the harm.”
First, collect all of the communications you have had with your advisor and remove or cancel any trading or other authority given to that person, McCardle says. Then talk to the advisor about the situation.
Immediately write to the financial advisor’s compliance officer or supervisor, adds Marc Fitapelli, a partner at securities law firm Fitapelli Kurta in New York City. “It is critical that a complaint is put in writing because financial advisors are required to disclose all written complaints on their securities license. Send the complaint to someone other than the advisor that you are complaining about in order to ensure that it is not simply ignored.”
For instance, you might file a complaint with the advisor’s firm, the Financial Industry Regulatory Authority (FINRA), state or federal authorities, or with any professional organizations the advisor belongs to, or all of the above. Professional organizations, such as the Certified Financial Planner Board, may have their own ethics committees that can revoke credentials. Brown says the National Association of Personal Finance Advisors steps in after a client has taken action with the appropriate regulatory agency. Once you have filed your complaint, you can contact a lawyer and choose arbitration or litigation to recover any losses.
If the conduct is severe enough to be considered criminal, a report to the state attorney general or U.S. attorney’s office would be necessary, McCardle says. FINRA’s investor complaint center for fraud or unfair practices referred 785 fraud and insider trading cases for prosecution in 2016. There were 3,456 customer arbitration cases filed in 2017, according to FINRA. Most of these cases settle, but for those that end up in court, the customer is awarded damages in about 40 percent of the cases, McCardle says.