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CAPITAL IDEAS: Financial advisors are the worst

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By Wednesday, Mar 20, 2019 Trade and Commerce 6

Dalton — Financial advisors are the worst. And that’s coming from the guy who owns a financial advisory firm.

There are shades of “worst” for sure. For example, a couple decades ago, Paul Allen, co-founder of Microsoft, was being grilled about some bugs in the latest version of their software and he replied, “all operating systems suck; we just suck less.” And in that context. I’ll be the first to admit that my firm is far from perfect. Sometimes we take risks and instead of a reward, we see a loss. Sometimes we get defensive in anticipation of a market drop and the market doesn’t drop. The key is that, if you’re going to make a mistake, you make darn sure it’s a small mistake.

“All operating systems suck; we just suck less.”

Sucking that way, whether it’s us or our colleagues, isn’t reprehensible. It’s true in every industry. Some lawyers are better than others, but even the best lose cases. Some CPAs are better than others, but even the best miss a deduction from time to time. Some doctors are better than others, but not every patient can be saved. That makes sense to most people as services are by no means a commodity, and some challenges are more sophisticated than others.

But then there is another level of bad. We’re talking criminal. Last week the Securities Exchange Commission, a regulatory body for financial advisors, announced that 79 investment firms agreed to return $125 million to clients to whom they had sold inappropriately high-fee mutual funds when much-less-expensive alternatives were available. This restitution was the result of an SEC initiative that started about a year ago, promising no legal recourse if firms voluntarily came clean.

You can be sure there are a lot of others out there that didn’t come clean—think if the IRS said tax cheats could go ahead and turn themselves in now and just pay what they had owed. A small fraction would come clean, but you absolutely know the vast majority wouldn’t come forward. Not many people are going to subject themselves to further scrutiny. Additionally, the SEC initiative only applies to investment advisors registered with the agency, not to brokers, who are regulated by the Financial Industry Regulatory Authority, or FINRA. Brokers are more likely to use this method to overcharge clients, according to James Langston, president of Fiduciary Integrity, a share-class-assurance consulting firm. “RIAs, as a general rule, understand they have that fiduciary obligation,” Langston said.

This is a decades-old problem that is both national in scope and local in reach. “We’ve seen it from the smallest advisers to the biggest financial services firms,” Steven Peikin, co-director of the SEC Division of Enforcement, told lawmakers at a May 16, 2018, hearing of a House Financial Services subcommittee.

How do you know if you’re getting ripped off? It’s hard to know for sure. If it were easy, you’d know. I do have one red flag that is easy for you to notice that may tip you off.

I have investors come to me all the time to have conversations about their desired outcomes and concerns. Invariably the investor asks me to look at their portfolio. When I ask the investor what their advisor is charging, they might say, “Nothing; he does it for free.” What!? Did you hear what you just said? Is this guy running a charity or a business?

Hey, I get it. Family doesn’t get charged. Churches and nonprofits certainly don’t pay full fee. Not only is the advisor lying if he says he doesn’t charge you, but also (not to be rude), you’re naïve if you think that’s true. I’ve had this conversation personally probably 50 times over the last quarter century, right here in the Berkshires. But it wasn’t illegal; there was a loophole that allowed that stealing. And I’m going to call it stealing. The advisor puts the client in an expensive mutual fund and gets a kickback when they could have put the client in a more appropriate investment.

To be clear, a financial advisor could be double-dipping. Just because he charges you a fee doesn’t mean he’s not also taking that kickback.

I realize that, so far, I’ve only offered you a warning when a solution may be more appropriate. One solution would be to read (or have a lawyer read) all of those legal documents that probably went right into the recycling bin when you first got them. And that’s not a dig on you. Do you think I ever once read the terms and conditions when updating my Safari software? No. I get that you probably won’t do that, even if it helps you to better understand how your financial advisor is being compensated. So here is a more realistic solution: Have a conversation with your financial advisor. It’s perfectly appropriate for you to ask for tax returns or profit-and-loss statements and have them explain where their revenue is coming from in general, and, specifically, from your accounts. You don’t have to frame the conversation that you’re accusing them of anything. There is absolutely no need to be confrontational. Instead, approach it as doing your due diligence to be sure they are a long-term sustainable enterprise. You are partners—your advisor knows everything about you, and they should be ready and willing to share everything about themselves.

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Allen Harris, the author of ‘Build It, Sell It, Profit: Taking Care of Business Today to Get Top Dollar When You Retire,’ is a Certified Value Growth Advisor and Certified Exit Planning Advisor for business owners. He is the owner of Berkshire Money Management in Dalton, managing investments of more than $400 million. His forecasts and opinions are purely his own. None of the information presented here should be construed as individualized investment advice, an endorsement of Berkshire Money Management or a solicitation to become a client of Berkshire Money Management. Direct inquiries to aharris@berkshiremm.com.


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6 Comments   Add Comment

  1. Stephen Cohen says:

    Perhaps Mr. Harris was unaware that off and on for many years there have been amnesty programs by the IRS for US taxpayers who did not report foreign income. There is a penalty and you must pay accrued interest but that is far preferable than being indicted for tax fraud. Hopefully Mr. Harris discusses the overall financial picture of his potential clients in detail.

    1. Allen Harris says:

      Mr. Cohen, the IRS shut down its voluntary disclosure program on September 28, 2018 due, in part, to only 0.000396% (not a typo) of US taxpayers having opted in (according to the IRS and the Tax Foundation) over its nine year experiment.

  2. Stephen Cohen says:

    Of course you understand that few American tax payers have foreign accounts, and even fewer are tax cheats who don’t report that income on their returns. The program was designed and only related to those taxpayers, but perhaps you were unaware of that.

    1. Robert says:

      Stephen, do you really want to discuss finances in a public forum? I think not.

  3. Stephen Cohen says:

    The amnesty program was directed solely at taxpayers with foreign unreported income, a very small percentage of our taxpayers, but perhaps you were unaware of that fact, as you were also unaware of the program.

  4. Stephen Cohen, BA, MBA, JD says:

    I agree, it would be like dueling with an unarmed man.

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