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When another advisor gives terrible advice to a client

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The gray-haired gentleman was about the same age as my dad. Sitting across from me, he seemed nervous and maybe a little embarrassed.

“I’m sorry to be taking up your time,” he said. “I feel a little silly being here in the first place. But my brother says you can help. I hope he’s right.”

The gentleman’s younger brother, a client of mine, had asked me to review his sibling’s retirement account. He had been complaining about the rate at which his balance was dwindling. This was during a period in which the markets were relatively robust, so my client sensed that something might be amiss and was hoping I could help his brother understand what was going on.

A retired firefighter, the elder brother had developed good saving habits and had managed to leave the day-to-day workforce with close to a combined $1 million in his IRAs, pensions and other retirement accounts. About seven years ago, he told me, he had placed his assets with a financial advisor who came highly recommended by a friend.

“I don’t know much about finance and I know nothing about the markets,” he said, “but [the advisor] assured me that he would take care of everything.”

Just before sliding his account statements across the desk to me, he said, “I’ve tried to be careful about how much I withdraw from my accounts, and I only take what I need to supplement my Social Security, but it seems like the money is just going out of my account awfully fast.”

The retired firefighter was holding a retirement portfolio that consisted mainly of put options on oil stocks.

Looking at the account statements, it was easy to figure out why: With little to no investment experience and — judging from what he’d told me so far — a risk tolerance close to nonexistent, this retired firefighter was holding a retirement portfolio that consisted mainly of put options on oil stocks.

“[The financial advisor] assured me over and over that he was taking good care of me,” he said. “But it seems like I’ve been losing a lot of money lately — $150,000 in the last six months alone.”

Subsequently, I learned that the ex-firefighter had given the advisor discretionary trading authority for his retirement account. The advisor was writing cash-covered puts, which is allowed in a retirement account, so that when the options were exercised, he was buying the stock. But when oil companies ran into hard times in 2014, the account value took a beating.

From his recollections of meetings with the advisor, I also pieced together that the retiree had a poor understanding of what he was investing in and why the advisor thought put options were a good idea in a retirement account.

I wish I could say this scenario was an isolated incident. Unfortunately, a startlingly high number of financial advisors have committed some form of misconduct, according to a study published in February 2019. Authors Mark Egan, Gregor Matvos and Amit Seru, who have since created a website to publicize their findings, report that as much as 20% of the advisors in some firms had been guilty of some form of misconduct. Sadly, the study also notes that instances of misconduct are highest at firms with retail customers and which are located in counties with a low level of education, a higher concentration of elderly people and with access to higher-income populations.

To make matters worse, the resources that consumers should be able to depend upon for reliable information about an advisor’s regulatory behavior are, all too often, undependable.

The efforts of the CFP Board will be for nothing if lapses in ethical behavior and erratic regulatory oversight undermine the reputation of our profession.

As reported in The Wall Street Journal in July, the CFP Board of Standards website, LetsMakeAPlan.org, has an inconsistent record for accuracy, including missing notices of past disciplinary actions, unreported customer complaints and other omitted red flags for questionable behavior by advisors.

Make no mistake: I am very proud of my CFP designation and I truly believe in the principles of fiduciary practice that undergird our industry. I’m also happy to see the CFP Board working to boost the profile of the professional designation and make the public more aware of the advantages of working with certified financial planners.

But all the efforts of the CFP Board will be for nothing as long as lapses in ethical behavior and erratic regulatory oversight continue to undermine the reputation of our profession. If we’re going to advertise ourselves as a superior product, we must demand that our association do the same. We also have to hold each other accountable. There is no place in our industry for advisors who flout the fiduciary standard or who, like the advisor mentioned above, fail to insure both that their recommendations are suitable and that the client has a clear understanding of them. Among other things, this means that in situations where we are being asked to provide a second opinion on another advisor’s work, we must not be afraid to call it as we see it. Our clients and others are depending on us to tell the truth. The future of our profession depends on it.

In the case of the retired firefighter, I urged him to take action. He revoked the other advisor’s discretionary authority, closed his account and asked for a refund of the lost assets. In the end, he got back only a fraction of what he had lost. Even make the attempt, he had needed the confidence that came from my assurances that he had been treated unfairly. He has since placed his assets with my firm, and we are working to get him back on course.

Our clients should be able to depend on us to provide solid advice based on a comprehensive understanding of their situations. No client should ever sense they are being neglected because we are too busy to focus on them. They should never have to feel intimidated by insider jargon or complex investments they do not adequately understand.

Above all, they should never have cause to question our ethics or our adherence to industry regulations. Putting the client’s needs ahead of our own has to mean something beyond the three letters following our names. We have to recommit to doing business the right way — every day and for every client.

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