Advisor Blog

Ameriprise has consistently recommended its own RiverSource (now renamed Columbia - fund companies love to change names when the old name is associated with unpleasantry) funds to its clients despite their high expense ratios and often poor performance while ignoring better alternatives.  This is what happens when an advisor eschews fiduciary duty and operates under the FINRA suitability rule.  Stuffing accounts full of their own proprietary mutual funds is a very effective way of transferring clients' wealth to the owners/shareholders of the firm. 

However, ERISA law requires that the sponsor of an employee retirement plan must act as a fiduciary.  Ameriprise tried to do the same thing with its plan participants and offered them its own funds as investment choices within their 401(k) plan.  The result is a lawsuit by their own employees/plan participants.  Apparently, they resent having to invest in the same funds that Ameriprise recommends to its clients!  According to Barron's "surely thousands of articles have been written on how to pick the best mutual funds and spot the worst. But here's a tip that doesn't often come up: If a fund company's employees are suing for being forced to invest in their own firm's mutual funds, you probably want to steer clear".  We agree.

Now, listen to this, and I'll tell you 'bout the Texas...
I'll tell you 'bout the Texas Radio.
I'll tell you 'bout the hopeless night
Wandering the Western dream.

    - Jim Morrison, 1971

It seems that every time I turn on the radio over the weekend, I'm assaulted by a slew of what amounts to financial "infomercials".  They are actually very similar to the late-night TV commercials hawking everything from weight-loss pills to miracle hair growth remedies.  And, they are just about as credible.

These shows always have a disclaimer that's run at the beginning and the end of the show stating that the show is "for entertainment value only and should not be construed as investment advice".  At least, the last part of that statement is certainly true.  Unfortunately, we all know that they really are investment advice regardless of the disclaimer.

Some of the most incredible claims come from insurance salesmen trying to sell insurance products as investments.  The claims are often outrageous and frequently just plain wrong.  Last year, we heard one such show making claims that we knew were false.  So, we contacted the Texas Department of Insurance and made them aware of it.  They didn't seem to care much and actually said that there wasn't much that they could do until someone who bought the product complained about it.  In their own words, "we have to wait until the fraud actually occurs."  They suggested that we talk to the Attorney General about deceptive advertising.  That got us just about as far.  Don't count on the State of Texas to protect you from these lies.

As usual, the securities regulators are a little more vigilant.  One of the biggest spenders on "infomercials" in the D/FW marketplace is a guy that tries to convince people that they can hire his firm to time the market.  The host of the show uses a lot of silly sound effects and promises the "world's best" cookies to people that will attend his seminars.  FINRA and the SEC finally cracked down on his advertising practices, but he's still on the radio constantly - just being a bit more careful.

Then, there are the real bottom feeders - the guys pushing life settlements.  Despite all of the recent investigative reporting, many are still out there making unrealistic claims.  We've written about one particular group before - and they still have a website where they claim that "Our clients have never lost a penny of principle!"  Really?  Would you trust an advisor that doesn't know the difference between principle and principal?

It seems obvious that you shouldn't trust this type of "advisor".  But, how do you know who you should trust?  We've talked about this issue in previous posts.  Scott Maxwell has written about it in his essay series.  There are several good books that have been published recently that explain it well.  One of those is The Investment Answer.  We've recommended it before.  Another good one is The Little Book of Bulletproof Investing by Ben Stein and Phil DeMuth. 

Most potential clients are completely unaware of the bifurcated standard of care that exists between broker-dealers and Registered Investment Advisors.  Most of the so called "advisors" that work for major financial services firms are registered representatives of a broker-dealer.  Broker-dealers and their representatives are regulated by FINRA, the Financial INdustry Regulatory Authority.  FINRA is a self-regulatory organization of broker-dealers.  The standard to which FINRA regulated firms are held is called suitability.  In other words, if a product meets the FINRA definition of "suitable", it can be sold to a client.  This does not mean that it is the best product for the client.  In fact, it frequently is the product that pays the salesman (his card won't say that - he or she will be a "financial advisor" or "wealth manager" or an "asset preservation specialist", etc) the highest commission.  And, that's OK under the FINRA suitability standard.

On the other hand, Registered Investment Advisors (RIAs) are regulated by either the Securities and Exchange Commission (SEC, for larger advisors) or by the state regulatory authorities (for smaller advisors).  RIAs are held to a fiduciary standard.  The fiduciary standard is the highest standard of care under the law and requires that the RIA put the client's best interest first at all times, including putting it ahead of its own interest.

There is a vast difference between the two standards.  Knowing this, you may ask yourself why anyone would ever choose the lesser of the two.  It comes down to ignorance and obfuscation.  Most clients have no idea that the two standards exist.  Most broker-dealer representatives (aka salesmen) don't exactly go out of their way to explain it.  And, since more than 90% of the "advisors" out there are really FINRA regulated salesmen, the voice of the RIAs is often unheard through all the noise.  Nevertheless, this is extremely important and we can't imagine why anyone would choose to do business with an advisor that provides a lower standard of care.