There are a number of considerations to take into account when selecting an investment advisor, including whether that person has had any financial difficulties in the past. But are investment and financial advisors under a legal obligation to disclose past financial troubles? What information can investors expect an advisor to volunteer? What questions do you need to ask in order to make sound decisions?
As an investment advisor, it can be embarrassing to open up to clients about past money problems. As it turns out, a number of investment advisors are now saying that talking about past money issues is a great boon for business. This should come as welcome news for investors – the more you know about an advisor’s finances, the better you’ll be able to evaluate whether they have the expertise you want.
David Edwards is the President and Wealth Advisor at Heron Financial Group in New York City, and he’s a strong advocate for transparency when dealing with investors. In September of 2014, Edwards was quoted in Reuters as saying that people often feel vulnerable when talking about money, and informing his clients about his costly divorce creates a rapport and establishes trust.
Disclosing past money issues as a voluntary business practice is one thing, but what steps do advisors need to take in order to stay on the right side of the law? What kind of behavior can investors expect from their advisors?
Robert Wyrick, Jr, of MFA Capital Advisors in Houston, Texas, has much to say on the subject. When his wife was diagnosed with ovarian cancer, he spent $1 million on her treatments. Although he says this didn’t result in any financial difficulties, and he was still able to start his own business and send his two children to college, he believes that telling his clients about this expenditure is necessary to fulfill his obligations to them.
Says Wyrick: “There are different sets of rules for registered investment advisors and non-fiduciary brokers. As an RIA, you have a legal obligation to disclose certain things to your clients. This includes whether you’ve had any bankruptcies, liens or judgments against you.”
He says that FINRA-regulated fiduciaries are also obligated to reveal these issues to the government.
“You have to reveal this to the FINRA regulators as well as to the client. This applies both to fee-based investment advisors and RIAs.”
Earlier in 2014, the Wall Street Journal published an article about a number of advisors who failed to report bankruptcies, including Tiara Monique Jones – who later withdrew $1000 from two clients’ joint account without their knowledge. FINRA has permanently barred her from the industry.
Wyrick notes that non-fiduciary brokers are governed by a different set of laws and have different obligations.
If you’re a non-fiduciary broker, there’s no requirement to reveal (past money problems) to the client – but you still have to inform FINRA.
Wyrick also says that asking an investment advisor about their credit score is something that investors should be encouraged to do.
I think anything is fair game,” he says. “You should ask any question that comes to mind. Is it like asking a lawyer where they went to law school? That’s a fair comparison. It certainly is telling about how the advisor handles his own financial affairs. If someone is having a hard time, sometimes their judgment gets skewed. I think it’s fair for a client to ask how the advisor is investing their own money – and certainly if they’d had any difficulties, that should be revealed.
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