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The Cost of Bad Financial Advice

Bad Financial Advice Costs Investors Thousands

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Do you believe both stockbrokers and investment advisors have the same responsibility to act in your best interests? Would you be surprised to find out that there are two different legal standards that apply to the delivery of financial advice?

One standard is called “suitability”. The other standard is that of a fiduciary.

Currently, stockbrokers and registered representatives are held to the suitability standard; this means their recommendations must be suitable for you based on your age, risk tolerance and financial situation.

If they have their choice of several products which are all suitable for your situation, they may recommend the one which pays them the most in fees and commissions. Keep in mind, this may not be the product that is best for your situation, but as long as it is suitable, that’s ok. They do not have an obligation to educate you about other choices you may have.

A registered investment advisor must meet a more stringent standard; that of a fiduciary. A fiduciary has the responsibility to make recommendations in your best interest in all aspects of the financial relationship.

One couple, not understanding this difference, picked the wrong advisor and in less than seven years it cost them over $150,000 in fees and missed investment returns.

The advisor they picked worked for a large national brokerage firm. He did not take the time to educate the client about risk and return and the benefits of a diversified portfolio. Instead, he put them into a product that met their expressed need. A few years later when they were not happy, he put them in to a different product. A few years later, once again, a new product. All of these products met the suitability standard.

The client had invested $500,000. The result of all those transactions: over $75,000 of commissions to the advisor. The result to the client: they did not lose money, but they did not make much either. Their account grew at about a 2% rate of return to a total of $575,000 after seven years.

An investment advisor with a fiduciary obligation to the client would likely have taken the time to educate the client and direct them toward a more diversified approach, even though that was not initially what the client thought they needed. This diversified approach, following a conservative allocation, would have meant a rate of return net of fees of 6%, meaning their account would have grown to $750,000. This couple certainly experienced the cost of bad advice.

Where can you find advisors that are held to a fiduciary standard? One resource is NAPFA, a national association of fee only advisors (advisors who can not accept commissions).

Another organization called Paladin Registry pre-qualifies all of their advisors, and matches you to an advisor appropriate for your needs.

When searching for advice, a good rule of thumb to follow is simply to ask your advisor how they get paid. That will tell you where their loyalty lies.

It is certainly worth a bit of extra time to research and interview several potential advisors. After all, it’s your money and if you are like most people, you can’t afford the cost of bad advice.

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