Nearly a third of Americans think
that financial advisers are likely to rip off their clients.
But it’s OK, because they also know
it won’t happen to them.
Those are the dismal findings of a
new survey conducted by online money management company
Personal Capital. In its 2019 poll of 2,000 investors, the company found that
30% think a financial adviser “is likely to take advantage of a consumer.” But
97% trust their own financial adviser to act in their best interests.
“It’s always somebody else” who’s
getting ripped off, says Jay Shah, Personal Capital’s CEO.
Logically, it can’t always be
somebody else. But people are suckers for an engaging personality, some
plausible patter, or a shoeshine and a smile. It’s not how we rationally should
seek advice, but it is. (Medical experts note that people tend not to sue
doctors with a good bedside manner)
Scammers are out there
The survey comes in a week when two
financial advisers — a father and son — were convicted in Birmingham, Alabama,
for scamming clients out of $10 million. Former basketball
star Charles Barkley was among the victims of Donald Watkins, Sr. and Donald
Watkins, Jr. Barkley says they took him for $4 million. “We disagree with the
verdict but this is the way the American jurisprudence process worked so we
will continue our fight,” Watkins Sr. said, according to AL.com.
And the survey also coincides with
the news that the radio figure known in the Dallas area as the “Money Doctor”
has been shut down and charged by federal authorities with running a Ponzi
scheme that scammed his elderly customers.
William Neil “Doc” Gallagher, who
once wrote a book called “Jesus Christ, Money Master: Four Eternal Truths for
Personal Power and Profit,” hosted retirement planning programs on local radio
in the Dallas area. He said he had a “mission” to be “a vehicle of God’s peace
and comfort to as many people as possible, helping first with their financial
peace of mind, then also with their spiritual, emotional and family well
being.” He sold “guaranteed income” products to people in their 60s and older, says
the SEC.
From 2014 until earlier this year he
raised somewhere between $19 million and $29 million, the SEC says. Today:
There’s just $821,951 left.
Gallagher could not immediately be
reached for comment.
Financial planners who are accused
of fraud are reasonably rare. But as Personal Capital’s survey shows, many
Americans are oblivious to other, perfectly legal ways some in the industry may
be taking them for a ride.
Advisers
aren’t always required to act in their clients’ best interests
For example, 48% believe that all
financial advisers “have a legal obligation to act in clients’ best interests.”
But that belief is simply not true, note industry experts.
This so-called “fiduciary rule”
applies only to so-called Registered Investment Advisers, typically registered
either with the Securities & Exchange Commission or state regulators. The
North American Securities Administrators’ Association, which represents state
regulators, says in total there about 350,000 so-called RIAs in the U.S.
There are almost twice many
financial advisers who are not subject to this rule. Financial salesmen and
representatives regulated by the Financial Industry Regulatory Authority must
simply ensure that the products or investments they recommend are “suitable” to
the client. That leaves a wide area for potential mischief. FINRA says there
are 650,000 registered representatives.
Meanwhile, Personal Capital found
that only 44%, or just under half, of those surveyed even knew what they were
paying in fees on their financial products. As an illustration: For an investor who makes the maximum
contribution to their company 401(k) every year from age 18 to age 65, and
earns a typical 6% annual return, an extra 1% a year in fees will end up
costing them a third of a million dollars.
“The consumer really needs to take
control of their own financial lives,” says Shah.
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