Do investors have rights?
90 percent of an iceberg is under water. Photo: Ansgar Walk. Source: Wikipeida
We ought to. After all, it’s our money. But the financial industry is filled with fast-talking rogues who take advantage of people’s trust. 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.
First, investors have a right to honest, objective, competent advice. That seems like a no-brainer, but it can be 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 that need to be sorted out.
For example, is it legal to own a limited partnership in an IRA? How about real-estate? Sometimes the answer can surprise you. It may be legal, but there are significant tax implications – especially if you or a relative use the real estate that the IRA holds. Can a trust with multiple 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.
Investors have a right to know how their advisor is being paid. Conflicts of interest abound in this industry. Are there any incentive payments from the recommended investments? Is anyone else profiting from the 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 forthright. It may not get you a lot of friends. But it will get you the right ones.
Douglas R. Tengdin, CFA