Advisors Behaving Badly: Three Ways to Avoid Getting Scammed

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Nick Foy, CFP®
nick@greenwaywealth.com

Sometimes, investors are their own worst enemy. But too often, their “advisor” takes the cake.

Last week, the New York Times ran a story about an advisor at JP Morgan who rang up over $128,000 in commissions in a year, on an account worth just over $1 million:

“After about six months, she learned that the account, worth roughly $1.3 million at the start of 2017, had been charged $128,000 in commissions that year — nearly 10 percent of its value, and about 10 times what many financial planners would charge to manage accounts that size (emphasis mine).

The client has Alzheimer’s, and her 58-year old daughter was assisting her with managing the account and her day-to-day finances. The money was invested with what she considered to be a reputable firm, and she thought she was dealing with a trustworthy advisor. It turns out he’s not actually an advisor; he’s a broker who took advantage of a woman who couldn’t look out for herself, and a daughter who was doing her best to make good decisions on her mom’s behalf.

Amazingly, the broker (Trevor Rahn) still has a job with JPM, and he still owes his prior employer (Deutsche Bank) over $700,000.

Jack Duval has a nice write up describing exactly what Rahn was (probably) doing to generate such a large mountain of commissions, and how seniors should be protected from such predatory advisors.

So, how should investors proceed when reviewing their own advisor, or looking for a new one?

    1. Root out conflicts of interest. If your advisor is getting paid for something other than offering advice, steer clear. Sales charges and commissions are out. Just this week, Merrill finalized their decision to return to offering commission-based retirement accounts. Avoid them.
    2. Demand a fiduciary. Fiduciary is a funny word to say, but the meaning is significant for investors. Fiduciaries are required to act in their clients’ best interest, sort of like how it should be. The broker described above is not a fiduciary. He’s probably trying to argue that the investments he recommended were suitable for the client. The suitability standard is weak, and can lead to all sorts of conflicts (see above).
    3. Ask the right questions. NAPFA has a great tool to help you through the process, and offers advice on what questions to ask the people you meet with. They also have a tool to find advisors who are sworn fiduciaries. XY Planning offers a similar tool offering advisors who can work virtually, and offer payment plans to help investors without large balances receive great advice.

A great advisor helps people avoid costly mistakes that can keep them from achieving their most important goals. One of the most costly mistakes someone can make is to work with an advisor who isn’t acting in their best interest. But, it’s an easy mistake to avoid: find someone who is.

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