5 Conflicts of Interest in the Investment World

I was a full-service financial advisor for 24 years. It was the only career I ever had. Besides shoveling horse manure back on the farm I grew up on, it was really the only thing I knew how to do well. Often in my career, the manure I was dealing with in the financial services industry appeared to be the same that I shoveled as a kid, yet this manure was all dressed up in suits and ties.

I sold my practice in 2017 after losing a sister when she was only 51 and a business partner who was only 47. This was my wakeup call. I was getting frustrated over the conflicts of interests in the investment world and those deaths made me realize that life can be too short not to be enjoying what I was spending most of my waking hours doing.

Here are my top 5 conflicts of interest in the investment world

Soft Dollars

The pharmaceutical industry pays kickbacks all over the medical community. It’s not uncommon for some doctors and pharmacist to get soft dollars kickbacks for prescribing certain drugs. The same goes for investment firms and investment product companies. For example, it’s very common for mutual fund, annuity companies and alternative investment products to pay large sums of money to investment firms so they can be placed on the firms “recommended” list. Being on the “recommended” list will give these product companies a higher profile within the investment firms which generally means a higher volume of sales for their product. It’s a “pay to play” scheme used by most investment firms to extract money from the product firms. When working with an advisor, don’t accept just one option when they suggest a solution. Find out why what they are suggesting is the best investment for you.

Rogue Advisors

There are some greedy-ass advisors out there who just can’t help themselves. They routinely put themselves first over their client’s needs and continue to keep getting into trouble. It’s not uncommon to see an active advisor with multiple complaints, suspensions and fines. I’m not sure what it takes these days for FINRA and SEC to bar someone from the industry. Recently, there was a financial advisor in a neighboring city to me who was fined $100,000 by the SEC. He overcharged his clients $367,167 and was caught. He was required to pay the fine and pay back the clients. Think about that: he was caught red handed over charging his clients by 40% yet this asshole still had a job up until a few months ago before his new firm let him go. BUT…it gets worse for him. He owes the IRS over $550,000 and is being sued by several other parties. There is a chance that he may pop again somewhere.

One way to protect yourself against these rogue advisors is to do some homework. You can check on your advisor by pulling them up on brokercheck.com. Broker check will show the advisors history as well as if they’ve had any complaints, suspensions or fines. If you see a complaint, don’t hesitate to ask the advisor for some more information. Just like rogue advisors, there can be rogue clients and they can tarnish a record very, very easily. In my case I have a compliant on my record from a client I inherited from another advisor. The client had bought bonds for years and when he wanted a Lehman Brothers bond in January 2008, I sold it to him. Well, you know what happened in 2008. The client was not happy and started saying things like “I was misled”, “I was given guarantees”. Rule #1 as an advisor… NEVER MAKE GUARANTEES. A rule I knew, and know, very well. The complaint was small so the bank I was working for decided to settle rather than fight it. It was easier for the bank, but it tarnished my record.

Review your advisor on broker check. If they have a compliant, review what it was for and come to your own conclusion as to whether or not your advisor has your best interest in mind.

Annuity Slammers

Across the financial world there are advisors that will try to sell everyone an annuity. Do you need annuity? Maybe or maybe not. Are you going to get sold an annuity by these advisors? Yep. Why do they do it? Annuities pay one of the highest commissions among all investment products. (Notice I said one of the highest commissions. Annuities do not pay the highest commissions, that honor almost always goes to whole life insurance.)

I’m not anti-annuity because in the right situation an annuity can be a benefit. I am against the advisors who do 90%+ of their business in annuities. You can’t tell me that for every 100 people you meet with, 90 of them need an annuity.

Again, annuities do work in the right situation. Take ownership of your money and understand the options available to you.

Churning

Many of use have probably heard of the word “churning”. Churning in the investment world means that there is excessive trading in an account. Each time a trade occurs, you’re incurring a commission charge. The advisor doing the trading is receiving those commissions. Your advisor is making money, you maybe not so much.

Reverse churning is when you’re being charged a flat asset fee on your investment account and your advisor is doing nothing to earn that fee. For example, you’re being charged 1% a year on your $500,000 investment account at a large brokerage firm but you only hear from your advisor once a year. Your investment firm and advisor are earning $5,000 a year from you yet what are you truly getting for that fee?

As I have said many times before, know what you are paying in fees and charges. Don’t be afraid to ask, and if your advisor is vague in the answers, maybe it’s time to get a second opinion. If they are resistant to share all the fees and charges with you, it’s definitely time to get a second opinion.

FINRA

Financial Industry Regulatory Authority. It is the self-regulatory organization for all financial advisors who hold a series 7 license. Why does FINRA make the list? Well you see FINRA has the ability to clean up the above-mentioned conflicts of interests, but they rarely do. FINRA knows about all the soft dollars, the rogue advisors, the annuity slammers and the churners but they just don’t do enough to clean up these areas. Matter of fact when I was a full-service advisor, every firm I worked for had a compliance officer and each year that compliance officer would read off a list of items that was on FINRA’s “hot list” for the year. It was almost like they were broadcasting what they would be investigating during that year. For several years I’d hear about a product that FINRA wasn’t a fan of and they were investigating that particular product. I often thought to myself “If they weren’t a fan of the product and felt like it wasn’t a good investment for the public, then why not just ban the product.” However, what would happen is that they wouldn’t ban the product, they’d just go after the advisors selling the product and fine and potentially suspend them for using it. In the end, I dropped my series 7 so that I no longer had to deal with FINRA.

As an advisor, I’ve always enjoyed educating folks on their options and fitting them with the right product that would accomplish their needs and goals. These days I’ve kept my series 65 active so that I can offer hourly advice and monthly subscription packages to continue to help a limited number of people. I still give investment advice, but I no longer sell any products. Reviewing portfolios, helping younger folks get started with investing and moving folks away from full-service advisors and helping them manage their own money is what I enjoy doing. In short, I can do what I enjoy without the conflicts of interest that bothered me… I don’t sell anything. I don’t earn a commission. I just educate and help folks know their options and guide them on a track to financial growth.

“Nobody cares more about your money than you do.”

Make sure you’re showing your money how much you care about it by staying involved and being mindful of how your money is being managed.

Live free my friends,

Eric Gaddy

www.dialintoretirement.com

www.retireearly365.com