Thursday, June 23, 2016

Avoiding Bad Advisors and Ponzi Schemes



It has happened again. Another high profile Ponzi scheme has been uncovered by the SEC that impacted professional athletes, Jake Peavy, Roy Oswalt, Mark Sanchez and others. How can, not only professional athletes, but regular investors avoid this same fate? Now, there is a way.

Although, it would be poo-pooed by the financial industry itself, I think the time has come for the complete removal of accounts from financial advisor access. Yes. You read that right. What is at the core of what good financial advisors do? They give advice. Can they give advice without having access to client accounts? Yes, they can.

The challenge has been to get access to the information from a client and historically, clients have had to move their accounts to a new advisor in order to provide that information or at the very least, copies of their account statements. Often times, financial advisors will give away a financial plan as long as the client will move their accounts to that particular advisor. This is the old, obsolete way.

The futuristic option is using an advisor who has a financial planning program that has account aggregation that authorizes the advisor to see the client’s holdings, but not their account numbers. Advicent Solutions has just such a software program called Narrator Clients™. As an advisor, all they really need to know is what type of account it is and the holdings within. In fact, account aggregation sends over the holdings without the account numbers and it even keeps the custodian hidden from the advisor. Imagine that. When you really think about it, if you really are a good advisor, then this is all you need. If you are a client, then doesn’t this make more sense? This allows the advisor to give much needed advice, but with absolutely no fear on the client’s part of the advisor stealing their money. I know what you are thinking, “Why didn’t somebody tell me this before?”

Of course, the advisor would be confused about how they get paid under this model which brings us to the new Department of Labor Conflict of Interest Rule. In my opinion, the DOL’s main goal was to force advisors to disclose all fees, commissions and conflicts of interest and recommend transactions that are in the client’s best interest. This rule is infinitely more complex than this simple statement, but this explanation is close enough for government work. It is funny to watch all these financial industry people jumping up and down over this new rule, but they are looking at it from the gathering client assets point of view. A big mistake in my opinion. Please bear with me and allow me to rescue both clients from Ponzi schemes and financial advisors from a bleak future.

In the DOL rule, there is a clause about Level Fee Fiduciaries. According to their definition, Level Fee Fiduciaries are advisors who charge a fee based on assets-under-management, or a fixed fee. Herein lies the solution for both clients and financial advisors. Instead of the fee based on the assets-under-management, clients would be better served by a fixed fee that is direct billed to the client. A lot of financial advisors would balk at this fixed fee method of earning fees. They are so used to gathering client accounts and charging an assets-under-management fee that they cannot see the future. Well, I hate to be the one to break the bad news to advisors, but fee compression is well under way with the advent of robo-advisors. Further, the major name brand custodians are getting in the robo-advisor game and doing exceptionally well at it I might add. The point being that this method of charging an assets-under-management fee is going the way of the dinosaurs.

Picture this, if you will. In order to take as much risk as possible away from getting financial advice, clients should pay a fixed fee to a financial advisor for their advice and keep their account at a major name brand custodian. In addition, do not let your financial advisor have access to any of your account numbers or social security numbers. All they need is the number of shares held and the name of the holding and type of account. If you do not move your accounts to a financial advisor, then you do not have to give them your social security number either. Isn’t that great? A good advisor would still be able to give you much needed advice and earn a living by setting an appropriate fixed fee for the amount of services they deliver.

In this future model of financial advice, how is a Ponzi scheme going to happen? I got your attention now, don’t I? The bad advisor would not have access to your accounts, your account numbers or your social security numbers, or even know where your account is held for that matter and therefore they cannot steal from you. Now, if you write the guy a check to invest in his Ponzi scheme, or excuse me, I meant can’t lose business venture, then I cannot help you.

Included in the DOL rule, advisors will now have to tell clients what they do for their fee. In other words, describe what services they will provide for their fee. With this fixed fee approach, I do believe clients would be more apt to go this route, especially when you consider they are taking the risk of being fleeced by a Ponzi scheme out of the picture. Plus, they cannot run off with your money! That is as long as you don’t write them a check for that can’t lose business venture.

If you are a financial advisor, then you need to change your ways. If you are a client seeking financial advice, then this is your future. A Ponzi scheme-less future to believe in.

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