US Bill of Rights. Source: Wikimedia
We ought to. After all, it’s our money. But the financial industry is filled with fast-talking rascals who take advantage of our good-hearted tendency to trust other people. Ponzi schemes and outright fraud are just the tip of the iceberg. There are all sorts of ways for advisors to abuse their position that aren’t illegal. So we should think about what we have a right to expect.
First, investors have a right to expect honest, objective, competent advice. That seems like a no-brainer, but it’s harder than you think. Competent advice means that the advisor needs to know the laws – securities laws, tax laws, fiduciary laws – that govern the instruments under consideration. In today’s complex world, there are frequently conflicting issues to sort out.
For example, is it legal to own a limited partnership in an IRA? How about real-estate? Sometimes the answer will surprise you. It may be legal, but there might be tax issues – especially if you or a relative use the real estate in the IRA. Can a trust with remainder beneficiaries own a Real Estate Investment Trust? That depends on whether the REIT pays out principal as well as interest in its dividend. It’s complicated.
We should have a right to know how our financial partners are paid. Conflicts of interest are huge in the financial industry. Are there any incentive payments from advisor’s recommendations? Is anyone else profiting from a transaction? Where you stand can depend on where you sit, and who’s paying you to sit there. If I’m an insurance salesperson, I’ll probably get paid more if you buy an insurance product from me.
Being honest isn’t just telling the truth. It also means being clear and direct. Honesty may not get you a lot of friends. But it will get you the right friends.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”