Investment advisors who were secretly videotaped got a failing grade. Their advice was often wrong or misleading and there appeared to be a conflict of interest.
The CBC television show Marketplace aired a program last week about the quality and accuracy of recommendations given by various financial advisors. A woman posing as an investor with a $50,000 inheritance to invest visited several offices of many well-known investment firms.
The CBC program did not say how many advisors they spoke to, so we have no idea what percentage of advisors interviewed had performed badly. The topics discussed were all very important, so you would hope no advisor wasn’t able to give the correct and appropriate response.
The first issue was about debt. Advisors either did not ask the undercover investor if she had debt or when they knew, they did not suggest she use the funds to reduce that debt.
One advisor recommended debt. The inference made by the program was that advisors are paid when you invest and not when you use potential investment money to pay down personal debt.
Risk was not fairly explained by most, although one advisor did an excellent job of explaining how much one investment dropped in value during the stock market decline of 2008.
One of the topics covered with the worst information given to the undercover investor was on expected returns from the investment. The advisors that were videoed made predictions of significant capital gains.
One suggested her $50,000 investment would profit by $5,000 in a month or two and predicted a $20,000 gain in one year. That $20,000 gain would be a 40 percent return. That is ridiculous. The on air financial expert was not sure whether that advisor was incompetent or just lying.
A topic that got a lot of attention was fees. The undercover investor specifically asked what the fees would be on a mutual fund. One advisor said the fee was 2 percent but the fee was only charged on the growth of the investment.
That is incorrect. Fees are charged on the entire invested amount. The same advisor referred to this as a “free ride” for the investor.
Another advisor also said fees were just charged on the growth. This person seemed to be just guessing and did not appear to understand anything about how a client is charged a fee.
At the end of the program a warning was given to consumers and an interesting comment was expressed. The remark was about why random, undercover meetings were not performed by the regulators who are responsible for monitoring investment advisors.
Apparently that type of audit is planned, although Marketplace was not given any details.
The final word of warning was “buyer beware.” Sounds like good advice. Shopping for financial advice should be done by asking several specific questions.
If you are not satisfied with any aspect of your interview with an advisor, end the meeting and continue looking.