by Jack Waymire
Yes, because very few investors know how to identify real financial advisors and determine their quality before they select them. This opens the door to deceptive sales practices that are pervasive in the financial services industry. A confused investor is a vulnerable investor.
Mandatory Disclosure Requirements
Financial advisors do not come with quality ratings or track records. They also do not have any mandatory disclosure requirements. They are not supposed to lie or misrepresent their credentials, ethics, and results. But, they also do not have to voluntarily disclose information that may cause investors to reject their sales recommendations. It is the investors’ responsibility to uncover the facts.
All investors want competent, ethical financial experts helping them invest their assets. Consequently, every financial advisor claims to be an ethical expert whether it is true or not. Again, it is the investors’ responsibility to determine who is telling the truth. It is definitely a “buyer beware” world.
Financial advisors do not volunteer documentation for key information that impacts their competence and ethics. They prefer to present verbal information that is also called sales pitches. Investors have no record of what was said to them and it’s their word against advisors if there is a future dispute.
Financial advisors determine what investors’ hear and what they don’t hear. Deliberately withholding information that causes investors to reject sales recommendations and terminate relationships is a standard industry practice. It works because investors don’t know what they don’t know.
There are no ratings for financial advisors because there are no public databases that contain all of the information that investors need to determine their quality. FINRA’s website contains licensing, employment, and compliance records, but this is as close as the industry gets to public disclosure. Investors are responsible for obtaining additional information that helps them select the right financial advisors.
Ratings that are produced by an objective third party would help investors determine financial advisor quality. But, it is not going to happen. There are ratings based on public data because there are no mandatory disclosure requirements. Plus, the financial service industry does not want investors to have this information. Investors would not buy from financial advisors with low quality ratings.
Financial advisors say they do not have track records because all of their clients are different. This is partially true. The reason it is not totally true is advisors could divide their clients into categories based on age, return objective, and risk tolerance and develop track records for each category. In the absence of legitimate track records, investors have no way to select advisors based on past results.
The Game Changer
Paladin (www.paladinregistry.com) introduced a set of free tools that investors use to obtain information from advisors, develop quality ratings, and produce track records. There is one issue. Because there are no mandatory disclosure requirements financial advisors must voluntarily disclose information to investors.
Paladin has researched more than 30,000 financial advisors and it can tell you high quality advisors have no problem providing voluntary information – they have nothing to hide. However, low quality advisors use several types of deceptive sales tactics to avoid full disclosure. Smart investors have to learn to avoid financial advisors who withhold information.
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