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Why a reputation of shadiness persists in the financial advisory industry

Quite literally the truth never sees the full light of day -- and clients and quality advisors pay a price for it

Monday, September 30, 2013 – 5:15 PM by Guest Columnist Jack Waymire
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Jack Waymire: Advisors still have to win to make money. Most advisors do what it takes to win.

Brooke’s Note: Never doubt its power — writing something down. Whether you’re extracting a confession from a criminal, writing a business plan or setting a goal for eating less ice cream, ink on paper has an effect that is outsized to the act. In this article Jack Waymire makes his case for why it is just a little too convenient that financial advisors don’t put more in writing on behalf of clients and the price paid for paving a road with good intentions.

Institutional investors enjoy a better reputation for investing success than retail investors. You might believe it’s because the deck is stacked in the favor of big companies because of increased sophistication or bigger asset amounts.

But consider this:

There are very different standards when advisors sell services to institutions versus mere humans. Institutions require clear documentation — another way of saying that promises are spelled out in writing. In fact, trustees of pension plans must, by law, document key data that impact how they invest. The Department of Labor, overseer of 401(k) plans, says the investment of retirement assets is too important to rely on sales pitches and other verbal communications. See: 6 reasons why RIAS can’t — or don’t want to — have track records.

And yet, that is exactly what happens when advisors market financial advice, products and services to individual investors. There are no mandatory disclosure or documentation requirements. Investors are supposed to develop their own tools and practices to vet advisors and products when they buy investment services. See: Why only 14% of RIAs volunteer complete pricing information to clients and why selective fee disclosure is not a winning strategy.

There has been a lot of discussion about transparency in the financial service industry, but there has been very little discussion of this topic — and what makes the status quo persist. See: Regulation needs one simple theme: transparency.

100 advisors

With that in mind, we conducted a survey to learn more about the issues. The survey asked advisors about transparency and documentation for five categories of information: credentials, ethics, compensation, investment expenses and potential conflicts of Interest. We included the issue of documentation in our survey because our initial research showed documentation was the highest form of transparency; that is, what an advisor was willing to disclose in writing.

The Paladin Research study was based on telephone interviews with 100 financial advisors who are 5 Star rated members of Paladin’s Registry (Paladin uses a proprietary algorithm to rate the quality of advisor credentials, ethics, and business practices. Advisors have to score in the 90th percentile or higher to receive a 5 star rating). All of the advisors in the Registry are RIAs or investment advisor representatives, acknowledged fiduciaries, and fee-only or fee-based. However, virtually all of them used to be sales representatives and they compete against sales reps for new clients on a daily basis.

In the survey, the advisors believe that 83% of advisors, including their peers and sales representatives (Series 6, Series 7), rely on sales tactics to win new clients and also use sales pitches to gain control of investor assets. Furthermore, the advisors believe they avoid transparency that discloses weaknesses and documentation that produces a written record of their sales claims.
See: How exactly RIAs can leverage the new transparency as a marketing tool.

Control of information

It is common sense, but the survey showed that advisors want to selectively disclose the information they provide to investors. This allows them to underscore data that help them win business and conveniently fail to mention other information that might quash a sale. See: 6 ways to advertise your investment performance and not run afoul of regulators’ wrath.

Vulnerable investors

Currently, there are no mandatory disclosure requirements. Advisors are supposed to tell the truth if investors ask the right questions. But, very few investors know enough to ask those questions. They select advisors based on the information that is controlled by the advisors who want to sell them investment products. investor dependency makes them very vulnerable to advisors who use questionable sales practices. See: 10 advisors explain how they build sales without getting 'salesy’.

Why avoid transparency and documentation?

Eighty-six of the advisors we surveyed said they did not practice voluntary transparency or documentation. Their primary reasons are a pure reflection of the sales culture that dominates the financial service industry.

• They do not volunteer information they do not want investors to have.
• Documentation reduced the impact of their personalities and sales skills.
• Transparency and documentation had a negative impact on their sales success.

Who wins?

The big winners, based on current industry regulations, are lower-quality advisors who are able to control what they communicate to investors. Undocumented verbal communications maximize the impact of their sales skills and the use of three aggressive, unethical sales tactics: misrepresentation, omission and exaggeration.

The biggest loser

One obvious loser is the investor who does not ask the right questions and does not know good answers from bad ones. Disclosures that protect investors should not be overbearing. Advisors should be required to provide the information investors need to make the right decisions. This investor is prone to selecting advisors with the best personalities and sales skills. Even more ominous, he or she may select the advisor who creates the highest “undocumented” expectations for future performance. See: How a suddenly wealthy, young Bay Area widow found her RIA after months of fruitless efforts.

But we believe there is a second, less obvious, loser: the higher-quality advisors (those who hold degrees, have years of experience, high-quality certifications, clean compliance records and no conflicts of interest) who use the same sales tactics as their lower-quality competitors. We believe this is a carry-over from their sales rep backgrounds. They have changed their role, but not their sales tactics. All of their accomplishments become irrelevant when investors select the advisors with the best sales pitches.

Advisors still use sales tactics to win new clients. However, they are RIAs and IARs who are financial fiduciaries and thus are under more scrutiny to put investors’ interests first. However, it is our opinion that fiduciary standards do not change the marketing tactics of financial advisors. They still have to win to make money. Most advisors do what it takes to win.

Buyer beware

We do not believe fiduciary standards will ever apply to stockbrokers. The industry cannot afford to take the financial risk of acting in the best interest of investors. How does the industry sell products that maximize revenue if those products have excessive expenses and inferior performance? This business practice would have to change, which could damage company revenue and advisor incomes. See: FINRA’s scandalous litany of failures and its efforts to redefine the true fiduciary standard out of existence.

We believe fiduciary standards for advisors are flawed. RIAs and IARs are supposed to act in the best interests of investors, but they also do not have mandatory disclosure or documentation requirements. Even in the fiduciary world it is “buyer beware.”

Jack Waymire spent 28 years in the financial services industry. For 21 of those years he was the president of an RIA that provided advice and services to more than 50,000 individual and institutional investors. He is the founder of Paladin Registry, which provides free tools and information to investors who use the services of financial advisors.

Mentioned in this article:

Paladin Digital Marketing
Consulting Firm, Marketing & Public Relations, Investor Referrals
Top Executive: Jack Waymire

fiduciary Advisor Advocate

fiduciary Advisor Advocate

October 1, 2013 — 4:30 PM

This is not shocking but it is sad. I wonder how some of these advisers would feel next time they go to the Doctor with some ailment and the Doctor decides there is no need for he/she to follow protocol, disclose potential negative interaction of medications…but heartedly gives the adviser/patient a slap on the back and a lollipop!

Knut Rostad

Knut Rostad

October 1, 2013 — 4:34 PM


You have made some important points about the lack of transparency and documentation among fiduciary advisors and the challenges investors face getting through the jungle of often hard to fathom or happy sounding sales talk. You could have underscored the damage to the profession from these practices by also suggesting the harm to our reputation when these practices lead to bad experiences. Many advisors appear to believe that when the public views “Wall Street” as akin to a foreign entity that does not share our values, this does not matter to RIAs. (A report last month by the American Enterprise Institute essentially drew this conclusion, It can be found on the Institute for the Fiduciary Standard website, http://www.thefiduciaryinstitute.org/fiduciary-september/fiduciary-september-2013). This view that RIAs are separate and apart from Wall Street in the public mind is mistaken. We are all tarnished.

I will differ with your conclusion that the problem is the fiduciary standard for advisors is “flawed.” The standard is not that which is flawed. The 40 Act standard is actually quite good.
In honor of Fiduciary September 2013, the Institute published a short paper, “Six Core Fiduciary Duties for Financial Advisors.” The paper outlines what we believe are the key elements of fiduciary conduct. In essence, I suggest adhering to these duties is no walk in the park. The paper is available on our website:

The “flaw” is enforcement by either government regulators or the profession itself. Enforcement that results in actual adherence to the standard. And what better time (than on the first day of a government shutdown) to suggest it will be the profession and the market place and not the regulators who make the fiduciary standard real to millions of investors.


Jack Waymire

Jack Waymire

October 4, 2013 — 6:35 PM

Hi Knut:

I absolutely agree that enforcement is a weak link. And as more and more reps become IARs the weakness becomes a bigger risk for investors. They do not have a process for determining the quality of financial advisors. They tend to buy the best sales pitch. That creates an opportunity for IARs whose primary skill is sales. And, since their pitches are verbal there is no record of their pitch or claims. Verbal also opens the door to abuse: Omission, Misrepresentation, and Exaggeration. A fiduciary standard for stockbrokers is half the battle. The other half is documentation. The ultimate form of “transparency” is what advisors are willing to document.

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