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My Financial Advisor Has Money Troubles: Fiduciary Obligations and Your Right to Know

Your Financial Advisor’s Background is Your Business, Too

There are a number of considerations to take into account when selecting an investment advisor, like your financial advisor’s background and money issues, including whether that person has had any financial difficulties in the past.

Though your advisor is ethically required to disclose things such as possible conflicts of interest, 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 should you ask a potential advisor in order to make sound decisions? In other words, does an advisor have fiduciary obligations, or legal obligations to put their clients’ best interests above their own?

Establishing Rapport with Investors by Being Open and Honest

Perhaps unlike discussing a possible conflict of interest, which advisors are required to disclose, it can be embarrassing for a financial advisor’s money issues to be part of the conversation. But, as it turns out, some advisors say that talking about past money issues can be a great boon for business. This should come as welcome news for investors, because the more you know about an advisor’s finances, the better you’ll be able to evaluate whether they have the expertise you want.

In fact, David Edwards, president and founder of New York City-based Heron Wealth, said that after he informed his clients about his costly divorce, a rapport and level of trust developed that may not have otherwise existed.

This bond is something that investors care about deeply.

Fiduciary Obligations: FINRA and Government Disclosure

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 should investors expect from their advisors?

Robert Wyrick Jr, managing partner of MFA Capital Advisors in Houston, knows firsthand the value of open and honest dialogue. When his wife was diagnosed with ovarian cancer, Wyrick spent $1 million on her treatments. While this didn’t result in any financial difficulties for Wyrick – he was still able to start a business and send his two children to college – he believes that telling his clients about this expenditure was necessary to fulfill his fiduciary obligations to them.

He added that fiduciaries regulated by the Financial Industry Regulatory Authority, or FINRA, are also required to reveal these issues to the government.

“You have to reveal this to the FINRA regulators as well as to the client,” Wyrick said. “This applies both to fee-based investment advisors and RIAs.”

Unfortunately, even the well-respected Certified Financial Planner Board of Standards, which markets its directory of CFPs as the golden standard, has failed to disclose many of its planners’ financial troubles. In July of 2019, reporters Jason Zweig and Andrea Fuller published an article in The Wall Street Journal that revealed major regulatory oversight:

“[The Board] has been presenting more than 6,300 planners (as clean that were not) … more than 5,000 have faced formal complaints from their clients over investment recommendations or sales practices, and hundreds have been disciplined by financial regulators or left brokerage firms amid allegations of misconduct. At least 140 faced or currently face felony charges, including one who pleaded no contest to a charge of possessing child pornography.”

Ask Anything and a Good Advisor Will Have the Right Answers

Wyrick notes that non-fiduciary brokers are governed by a different set of laws and have different obligations. Investors should make themselves aware of the differences to ensure their own protection.

Non-fiduciary brokers have no requirement to reveal past money problems to clients, but they must still inform FINRA. Wyrick also said that investors should ask an investment advisor about their credit score.

I think anything is fair game,” he said. “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.”

It’s important for investors to ask a potential advisor about fiduciary obligations, as well as why the advisor is not a fiduciary. Non-fiduciary advisors are sometimes considered broker/dealers, rather than advisors, by definition. If the advisor is non-fiduciary, he or she should have a good explanation.

[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Basic Investment Principles 101 – From Asset Allocations to Zero Coupon Bonds 2019 and Due Diligence Before Investing. This is an updated version of an article originally published on January 14, 2015.]

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About Mike Straus

Mike Straus is a freelance writer and creator of Brand Gesture.

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