Misdeeds of Rogue Advisors

What is the worst thing rogue advisors can do to you? Selling you too-risky investments? Milking your account for their own use? Pushing inferior house-brand products? Well, the most insidious is doing nothing and collecting a fat fee for the privilege.

First, however, understand that the vast majority of advisors are honest. In a white paper that AdviceIQ did on the integrity issue, we estimate that just 3% of advisors have serious negative history. Meanwhile, the American Bar Association records indicate that 8% of attorneys receive complaints annually. The American Medical Association says 5% of doctors are sued each year.

But regarding the advisor bad apples, the most feared misdeed is when an advisor gets you into a risky investment that collapses – say, derivatives linked to mortgages in 2008, right before the collapse. The advisor, usually a stockbroker who charges commissions, collects his cut and you collect a nightmare.

Then there’s the fear of outright theft. In Seattle last month, a judge sentenced advisor Mark Spangler to 16 years in prison for secretly siphoning off $46 million from his clients’ accounts and investing it in two startups companies he owned.

Next is the danger that, if you are a client of a large firm that sponsors its own mutual funds, your advisor touts its drag-butt internal products. A controversy is swirling around JP Morgan for allegedly pushing the house brands, instead of others’ products that were better. The firm’s advisors, critics charge, got paid more for selling the in-house goods.

While no one has quantified how many of these offenses occur, the likelihood is that they are rare and getting rarer. Increasingly, brokers are what’s called dual registered, so they must adhere to the so-called fiduciary standard that fee-only advisors use. That means they must put their clients’ needs at the forefront, so foisting a dog investment on them is a nonstarter. And as our study shows, the incidence of the Mark Spanglers and the Bernard Madoffs is low.

What about the house brand problem? More and more, this practice is a dinosaur. Regulators frown upon it. And it’s a sure-fire way to breed distrust and lose clients. Most advisors, of course, do not work for huge firms like JP Morgan.

No, what shivers my timbers are fee-only advisors who supposedly run your money, but actually do very little for the yearly cut of your assets (typically 1%) that they charge. The Securities and Exchange Commission is looking into this.

Called reverse churning, this approach has advisors indolently plugging you into the top 10 funds, and then letting the money lie there. Now, buy-and-hold strategies have a place, and you shouldn’t frantically turn over your account in a quest for ever-better gains or in the face of a downturn. Still, you need to rebalance your account periodically, and sometimes eject investments that don’t perform or show signs of doing so.

Regardless, your job as an investor is to pay attention to what you own, buy and sell. If you are fully engaged in your financial life, odds are that nobody can pull a fast one on you.

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AdviceIQ delivers quality personal finance articles by both financial advisors and AdviceIQ editors. It ranks advisors in your area by specialty, including small businesses, doctors and clients of modest means, for example. Those with the biggest number of clients in a given specialty rank the highest. AdviceIQ also vets ranked advisors so only those with pristine regulatory histories can participate. AdviceIQ was launched Jan. 9, 2012, by veteran Wall Street executives, editors and technologists. Right now, investors may see many advisor rankings, although in some areas only a few are ranked. Check back often as thousands of advisors are undergoing AdviceIQ screening. New advisors appear in rankings daily.