Several years ago, I used to play in a flag football league.
After catching a pass, I hit the open field and between me and the end zone was one lone defender.
As I glided across the field I knew exactly what I was going to do next: I was going to bust out one of my vicious Barry Sanders-like spin moves.
There was only one slight problem: I don’t possess any Barry Sanders-like skills.
Oh, yes, I’m decently athletic. But busting out such a move in the open field was not in my forte.
As I went to make the move, my cleats caught awkwardly on the ground and I ended up falling and landing directly on my hip. The field that we were playing on had several bare, hard spots and that’s where I landed. It hurt.
I knew that I’d hurt myself, but there was no way I wasn’t going to finish the game. The next day, the pain was so bad I could barely walk, so I decided to go to the emergency room. After getting an x-ray, it turns out I only had a very deep bone bruise. I was prescribed some pain medication and sent on my way.
Now, imagine if it was the same scenario, but before I even got x-rays, the doctor recommended that they amputate my leg. While I might not know much, I’m pretty certain that would be considered medical malpractice.
Medical malpractice happens a lot in the U.S. and we’ve all heard our horror stories – but what about financial malpractice? How often do we hear those stories? On a blog post I previously shared I revealed there are certain financial advisors I would like to punch in the face.
It is safe to say that all of them are qualified in some sort of financial malpractice, but the more engagement I have with my readers on this blog and the more clients I end up working with, the more I realize how much I come across instances of financial malpractice. This is how I define financial malpractice:
Financial malpractice is professional negligence by act or omission by a financial advisor in which the investment recommendation provided falls below the accepted standard of practice in the financial services industry and causes financial injury or a great loss to the investor.
In this situation, an investor was doing some online research. He had read up a little bit about the “Bank on Yourself” concept. If you ever heard of this concept, the general gist is that you take the equity in your home and use that and purchase some sort of guaranteed life insurance product, typically whole life, and since it has a guaranteed rate of return, you should net higher amounts than the interest you’re paying on your mortgage.
The investor wanted to know more about the concept so they filled out a form online and the next thing they knew they were talking to a representative. After only being on the phone with him a short time, the agent on the line quickly changed their story. Instead of whole life insurance, they quickly switched and started pitching a fixed indexed annuity. In particular, a specific fixed indexed annuity represented by the insurance company, Allianz.
When I asked the investor how much information this advisor had on them, he said very minimally. All he knew was his approximate age and how much he had to invest. For this supposed financial advisor to pitch an investment product – in particular, a fixed indexed annuity – without knowing anything about this client, I’d consider this financial malpractice.
Any advisor who doesn’t take the time and effort to get to know their client is only doing them harm and potentially causing them further financial injury.
If you start talking to any financial advisor about any sort of investment and they don’t ask you some of the basic questions, jump out of your seat, bolt to your car, and get the heck out of Dodge.
More Examples of Financial Malpractice
I wish I could say that was the only example, but there are more.
A blog reader once contacted me and told me how an “advisor” told her to cash out her 401(k) and put the money toward an indexed universal life insurance policy. Say what? The advisor never mentioned other options like, say, putting the money into a Roth IRA! Talk about financial malpractice! This kind of story makes me mad, and it should make you upset too.
Take a look at the full story I shared on the Good Financial Cents Facebook page:
Are you ready for yet another example?
Here’s another one from my Facebook page showing how commissions can sway some financial advisors to do what’s in their best interest – not their clients’ best interest.
Notice in this story how the client asked the right question:
What You Need to Know Before You Get Burned by Financial Malpractice
It’s important to do your homework to prevent financial malpractice from happening to you.
If it does happen to you, you should know how to respond.
Here’s what you need to know before you get burned by financial malpractice. Pay attention!
How to Do a Background Check on Your Advisor
Thankfully, you can look into the background of most credentialed financial advisors.
But the unfortunate truth is that many people don’t look into the background of their financial advisors. They figure that since the advisor has a business, an office, and was referred to them by a friend, they’re someone they should trust to handle their finances.
This isn’t always the case.
While some advisors have done what I would consider to be financial malpractice, sometimes it’s not malpractice – it’s just not the best they could do for their clients.
Let’s face it. Financial advisors have to make a living. But they should only make that living if they better the lives of their clients – not harm the lives of their clients.
I have a fiduciary responsibility to consider my clients’ interests above my own – it’s where my heart is at and I won’t sacrifice my clients’ wellbeing for a quick buck.
Important Questions to Ask a Prospective Advisor
While you’re at it, be sure to ask any financial advisor you’re considering hiring a few tough questions.
For example, your financial advisor should be able to point you to a few case studies that show they know what they are talking about. If your goal is to save for retirement, ask your financial advisor how they would help you reach your retirement goal and to show how it would feasibly work in your financial situation.
Beyond asking them about some case studies, be sure that they explain how they are compensated. This is where financial malpractice runs rampant. Make sure they are paid in a way that aligns their goals with your goals. More on this a bit later . . . .
How to File a Complaint Against an Advisor
Let’s say you’ve hired an advisor who you feel hasn’t done their job – they’ve practiced financial malpractice. What should you do?
First, it’s important to understand what financial advisors can and can not do.
Financial advisors can make specific recommendations about specific investments – hence, “advisor” in their title. These recommendations should be – and many times have to be – in your best interest.
Financial advisors can also buy and sell securities for you. You’re in control. They don’t do anything you don’t feel comfortable with. Keep in mind, though, that some contracts give financial advisors control over the securities they buy or sell for you without your prior authorization to buy or sell.
Financial advisors also can’t make misrepresentations or omissions regarding an investment they are recommending.
If you feel your financial advisor is guilty of financial malpractice, learn how to file a complaint.
Warning Signs You Need to Fire Your Financial Advisor
If you’re going to file a complaint against your financial advisor, you’re probably going to fire them, too.
There are many other warning signs than the ones mentioned above that should prompt you to fire your financial advisor.
For example, if your financial advisor is pushy and trying to get you to make quick decisions regarding your investments, run the opposite direction as fast as you can. Good financial advisors want their clients to understand why they are making the recommendations they are making. The last thing they’d want is for their clients to be left in the dark!
If your financial advisor is keeping you in the dark by pushing you to make a quick decision, make a quick decision to find another advisor as soon as possible.
Another warning sign that your financial advisor is committing financial malpractice is if they are putting all your money into one investment. Diversification should be a cornerstone of any portfolio, and if your advisor doesn’t think so, you need to move on.
There are plenty more warning signs that you need to fire your financial advisor. Take a look some more warning signs and protect yourself from financial malpractice.
How Financial Advisors Get Paid
Do you have a financial advisor? Do you know how they get paid? No? Well, it’s time to learn how!
Here’s the thing. Financial advisors generally pay themselves out of your investments. There’s nothing wrong with this – it’s convenient for their clients. But it is a problem if their clients don’t understand how or how much they are getting paid.
For example, some financial advisors sell Class A shares. These are types of mutual funds that have a front load – a fee for purchasing the funds. Many financial advisors make a living this way – but is it right for you as a client? There are better payment arrangements out there.
Another example, some financial advisors get paid an annual percentage of assets under management. The beauty of this payment arrangement is that when your investments do well, so does your financial advisor’s business. In other words, your goals are aligned: both you and your financial advisor have a financial incentive to grow the number of funds in your portfolio.
This is such an important topic, I recorded a podcast about it. Listen to how financial advisors really get paid!
Why Hiring a CFP® Professional is So Important
Before you hire a financial advisor, make sure they have credentials. Here’s why I believe you should hire a CFP® professional like me!
Listen, you don’t have to be a victim of financial malpractice. The more you know, the less likely a crooked financial “advisor” can do you harm.
I like taking the time necessary to explain to my clients how investments work. Any good financial advisor should do the same.
Don’t let anyone touch your money unless you’re comfortable after having done your homework.
Invest, but invest wisely with a financial advisor who has your best interest in mind!