Know Your Advisor

I remember years ago I was at a conference, attending a session by Professor Meir Statman of the University of California, Santa Clara and author of the book What Investors Really Want.  (Spoiler alert – they want everything.)  He was discussing behavioral finance and how money and investing do not involve just rational decisions, but emotional ones as well.  As a CPA and being rather analytical, it took me a few years to figure this out.  During his presentation, he referred to a good financial advisor as a “financial physician.”  While I thought this was a slight exaggeration and a potential insult to my friends who are physicians, there is some truth to the notion that having sufficient financial resources is almost as important as your health.  However, I do realize that money cannot buy everything, including good health.

So, Dr. Statman calls a good financial advisor a financial physician.  When we search for a physician, particularly a specialist or a surgeon, we ask our friends and family and our internist or family practice physician about their recommendations.  You wouldn’t want a physician who has a lot of complaints from patients, would you?  You should also feel the same about your financial advisor or broker.  (I do think there is a substantial difference between the two, but that discussion is for another blog.) A recent article from Bloomberg Business discussed the results of a study about broker misconduct. 

A newly released study entitled “The Market for Financial Adviser Misconduct”, authored by business school professors at the University of Chicago and University of Minnesota, finds that market forces and the industry’s self-regulatory mechanisms are failing to cleanse the bad advisors from the industry.  As a result, 73% of “financial advisors” (though the study actually analyzed FINRA-registered brokers, not independent Registered Investment Advisors (RIAs) like WMA, who are governed by the SEC) who disclose a material misconduct event on FINRA BrokerCheck are still employed a year later, despite the fact that such brokers are an incredible five times more likely to engage in misconduct again in the future.  (This is in contrast to many investments, which carry the caveat “past results are not indicative of future performance.”  Ironic, don’t you think?) The reason is that they are big revenue producers for the brokerage firm. The worst offenders, in terms of brokers with material misconduct disclosures as a percentage of the total number of brokers at the firm, were as follows:

Oppenheimer & Co.              19.60%

First Allied Securities            17.72

Wells Fargo Advisers            15.30

UBS Financial Services        15.14

Not surprisingly, broker misconduct was higher in counties in the states of California, Florida and New York.  Did you know that Palm Beach County, FL has 5,278 brokers?  I find this to be an astonishing number. The good news is that the county with the second lowest misconduct rate was Saline County, KS, which is about a 3 hour drive west of our office.

Here is an excerpt from a recent article about a rogue broker.  There should be some type of award for this level of misconduct.  From AdvisorHub:

Edward Beyn has given new meaning to the word chutzpah, generating $65,802 of fees and commission in less than four months from an account that began with under $70,000, according to a complaint filed this week by the Financial Industry Regulatory Authority.

Beyn in total collected about $1.7 million from six clients between February 2012 and May 2015 by “churning” more than 2,000 trades while working at Craig Scott Capital, LLC, the industry-financed regulator charged in a filing on Wednesday. The clients had about $4.3 million spread over nine accounts.

Beyn did not respond to a call seeking comment. He currently works at Rothschild Lieberman, another firm in New York City’s Long Island suburbs, according to his BrokerCheck record.  An official at Rothschild was not immediately available for comment.”

I am not saying that RIAs never have complaints registered against them, or that every broker engages in misconduct.  The results of the study referenced above confirm that.  I have not seen a similar study with regard to RIAs, but would like to see one for comparison.  Additionally, I do not want to infer that RIAs have no conflict of interest when working with their clients.  It is my opinion that virtually every advisor/broker has some conflict of interest with a client, even if it is minor.  So, what can you do to find the right “financial physician?”

  • At a minimum, if working with a RIA, make sure there is a custodian of your funds involved.  The big three are Charles Schwab, Fidelity and TD Ameritrade.  Remember Bernie Madoff?  He did not use a custodian, but instead created fictitious statements.  The custodians do not follow this practice.  
  • Get referrals from family and friends, if possible.
  • Do some research on the broker/advisor at or
  • Meet with more than one broker/advisor to see if your personalities and investment temperament mesh. This is much more important than you realize.

 Your financial health depends upon your decision.