Lack of Independence is a Major Hidden Risk for Investors

The ability or willingness to provide independent advice is a critical characteristic for financial advisors and financial planners. That’s because the opposite of independent advice is tainted advice that impacts the performance, risk exposure, and expenses of investor assets. However, most investors have no way of determining the actual independence of the advice they receive from their advisors:

• Independent advice that’s based on objectivity and integrity benefits consumers
• Tainted advice benefits financial service companies and financial advisors or they wouldn’t provide this type of advice
• Because bad advice benefits the industry, the issue has been hidden from investors so they don’t know this type of financial risk exists
• All companies and advisors say they provide independent advice even though it’s not true most of the time
• This deceptive tactic works because most investors don’t know how to determine the quality of advisors

Following are a few tips that will help investors determine the “true” independence of the advice that they receive from their financial advisors and financial planners.

What is Independent Financial Advice?

Independent advice is based on complete objectivity that’s always in the best interests of investors. The opposite of independent advice is tainted advice that’s impacted by the self-interests of financial advisors and their companies.

Financial advisors, financial planners, and financial services companies provide bad advice for a common reason:

• They make more money! Advisors put their needs for income, benefits, and sales results ahead of investors’ need to achieve their financial goals
• They make more money! Financial services companies put their need for revenue and profit ahead of investors’ needs.

How does the Industry hide this Information from Investors?

Financial advisors and financial planners are not required to disclose their conflicts of interest to investors. It’s up to the investors to determine the magnitude of the risk for advisors who influence or control their investment decisions. Since most advisors are adept at hiding this risk, most investors don’t know it exists. The same is true when they select financial advisors who don’t have audited track records or mandatory disclosure requirements. It’s up to investors to determine the competence and integrity of advisors.

The financial services industry is a major special interest group that spends hundreds of millions of dollars per year on lobbyists to make sure regulations favor the industry and not investors. This is the reason there are no mandatory disclosure requirements for advisors’ credentials, ethics, business practices, and conflicts of interest. The risks were created by the industry so companies could make more money. Then the risks are hidden from investors by lobbyists, company business practices, and advisors. Investors should be very cautious when they select advisors and follow their advice.

How Can Investors Identify Tainted Financial Advice in Advance?

Identifying bad advice at the point of delivery is very difficult. Companies use advertising and PR to create a perception of trust and advisors are skilled at developing friendly relationships. Plus, companies and advisors are careful to omit any information that negatively impacts their sales success. Misrepresentation and omission are two sales tactics that are used by companies and advisors who provide tainted advice.

Following are tips that investors can use to identify tainted advice sooner rather than later:

• Advisors restrict investment choices to products that are manufactured by their companies
• Advisors restrict investment choices to the products of particular companies
• Advisors don’t provide information that’s easy for investors to understand
• Advisors recommend products that have poor relative performance and/or high expenses
• Regardless of investor need, advisors always recommend insurance products as solutions
• All of the advisors’ recommendations pay big commissions (5% or more)
• Advisors don’t provide any documentation for investment risk, expenses, or the amounts and sources of their compensation

How can Investors Identify Advisors who Provide Tainted Advice?

Any advisor can provide tainted advice, but there are several key advisor characteristics that increase the risk of investors receiving bad advice:

• They are employed by or licensed by companies that produce their own investment products
• Their only method of compensation is commissions which means they are paid by third parties and not by the investors who depend on them
• They are securities and insurance licensed which permits them to sell products for commissions. They are not Registered Investment Advisors or Investment Advisor Representatives which permits them to provide advice and ongoing financial services for fees
• They do not act in a fiduciary capacity when they make sales recommendations
• They hide information by not providing any disclosure for their credentials, ethics, business practices, or services

How can Investors Identify Companies that Provide Tainted Advice?

There are three types of financial service companies: Manufacturers, distributors, and companies that do both. For example, a mutual fund family is a manufacturer of investment products. There are also companies that distribute products, but do not manufacture their own products. By far, the riskiest companies are the ones that manufacture and distribute their own products.

You’ve read about companies’ tainted advice that’s caused by conflicts of interest:

• Company research analysts issue positive reports on bad stocks because their companies have investment banking relationships with the companies that issued the stock
• Companies have undisclosed revenue sharing arrangements or bonus arrangements with particular manufacturing companies
• Companies require their advisors to sell the products that generate the most revenue regardless of quality or expense
• Companies sell products with excessive expenses because they make more money
• Companies create trust in one business, for example bank products, then use the trust to cross-sell investment and insurance products
• Companies have paid billions of dollars of fines for their deceptive sales practices and undisclosed conflicts of interest that damage investors
• Thousands of company executives and advisors have been convicted of felonies that resulted in prison sentences or expulsion from the industry.

Get it in Writing

Less ethical companies and advisors are very skilled at hiding conflicts of interest. Advisors use personalities to get investors to like and trust them. They use sales skills to get investors to buy their advice and sales recommendations. Because all of the information is controlled by companies and their advisors, investors rarely receive the information they need to protect their interests.

The best way for investors to protect their financial interests is to ask the right questions and require all responses to be in writing. The information should include the following documentation:

• A Professional Profile that describes the advisors’ credentials, ethics, business practices, compensation, and services
• A Disclosure Statement that describes any potential conflicts of interest
• A Code of Ethics that describes their ethical standards for the treatment of their clients

This type of documentation has a much higher probability of being accurate than information in sales pitches that’s easy to misrepresent and deny later. Less ethical advisors will not want to provide this type of documentation because it forces them to disclose their weaknesses.