Protecting Your Financial Future Part 1: Who are Investment Professionals and What Do They Do

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Who are Investment Professionals and What Do They Do

It used to be said that for most Americans, their largest asset was their home. That statement is probably no longer correct. 401K plans and retirement accounts are now the largest asset that most Americans have, with many retirement and other investment plans running into the six and seven figures. In fact, a modestly comfortable retirement requires the retiree to start retirement with an investment account exceeding $1,000,000. The reality, however, is that few Americans understand how investment accounts work. They may have a generalized idea about stocks and what they are and they may see the stock market move higher or lower, but they likely do not understand what is causing losses in their own accounts. They will typically rely upon the advice and explanations of their stock broker, investment advisor or financial planner to make trades and explain losses. Too often, substantial reductions in investment accounts are blamed on “market conditions”—the account holder is told to wait as the “market adjusts”. Frequently, an investment professional will tell the account holder that it is a good time to invest because “the market is down”.

Markets and stocks can and do decrease in value, and even competent, prudent investment professionals lose money for their customers, but there may be other reasons for the loss. Before delving into the various reasons for unexplained losses (Part 2 of this series) and the ways to recover from those losses (Part 3 of this series), investors should understand the different type of investment professionals that exist and the difference between their professional designations. Not all investment professionals are created equal.

A. Types of Professional Designations

Investment professionals use many different titles that give the appearance of education and professional licensure or certification that does not exist. For example, there are many individuals who hold themselves out as financial advisors (advisers) even though they have no specialized knowledge, education or training and no professional certifications or licenses. In order to be a “financial advisor”, all one needs to do is print business cards and open an office. “Financial advisor” sounds impressive to the uninformed. The term sounds synonymous with “investment advisor” or “financial planner” which, as explained below, are recognized professional designations.

In fact, the FINRA (the Financial Industry Regulatory Authority) has identified a number of titles currently in use that have little to no substantive value. FINRA warns investors to “be aware that Financial Analyst, Financial Adviser (Advisor), Financial Consultant, Financial Planner, Investment Consultant or Wealth Manager are generic terms or job titles, and may be used by investment professionals who may not hold any specific designation.” Titles proliferate, however, and the presence of an impressive title does not mean the individual holding the title has any particular expertise or competence. In fact, there are outright con-men and women that adopt these titles as part of a scheme to defraud unsuspecting investors.

There are three professional designations used by investment professionals that have significance. It should be noted, however, that even individuals holding legitimate professional designations commit fraud and misconduct. The mere fact that the investment professional holds the title “stockbroker” or “investment advisor” does not mean that a significant loss should not be investigated.

1. Stockbrokers

The oldest professional designation by investment professionals is “stockbroker” or “registered representative”. Stockbrokers are regulated by the Securities and Exchange Act of 1934 and are defined under the Act as “any person engaged in the business of effecting transactions in securities on behalf of others”. Companies in the business of trading securities are referred to as “Broker Dealers”. The individuals who work for the Broker Dealers are referred to as “registered representatives”.

In order to qualify for this professional designation, a broker must:

  • Register with the Securities and Exchange Commission (SEC).
  • Be a FINRA member.
  • Pass certain qualifying examinations, specifically the Series 7 (General Securities Representative) and Series 63 (Uniform Securities Agent State Law Exam).
  • Be employed or associated with a broker-dealer firm.

The law requires stockbrokers to provide “suitable” investment advice based upon each client’s income, risk tolerance, investment objectives and overall financial condition.

2. Investment Advisors

Investment advisors, technically Investment Advisor Representatives (IAR’s), are also regulated investment professionals not to be confused with “financial advisors”, which is a generic title that would refer to almost anyone. Investment advisors provide advice on the sale of a variety of investment products, including stocks, bonds, mutual funds and exchange based funds. Investment advisors sometimes use other titles like “asset manager”, “investment counselor”, “investment manager”, etc.

Investment advisors must be registered with the SEC or a state securities regulatory agency. They must also pass a Series 7 (General Securities Representative) examination or a FINRA Series 65 (Uniform Investment Adviser Law) examination as well as a Series 66 (Uniform Combined State Law) examination.
Investment advisors have a higher duty than stockbrokers and have “an affirmative duty of utmost good faith and fair disclosure of all material facts as well as an affirmative obligation to employ reasonable care to avoid misleading clients”.

3. Financial Planners

An individual does not need any specialized training or licensing to call himself or herself a “Financial Planner”. However, many financial planners do hold the Certified Financial Planner (CFP) designation which is significant. In order to become a CFP, an individual must pass a series of examinations in the areas of asset protection planning, taxation, insurance, estate planning and retirement. To maintain this designation, CFP must complete annual continuing education requirements.

Financial Planners typically represent clients in the areas of:

  • Estate Planning
  • Insurance
  • Retirement Planning
  • Asset allocation

CFP’s have perhaps the highest legal obligations to their clients. Unlike stockbrokers or investment advisors, CFP’s have a fiduciary duty to operate in their client’s best interest and “at all times to place the client’s interest ahead of their own”.

B. The Significance of Designations

In the investment world, titles do have significance, both in terms of identifying relevant expertise and the investment professional/investor relationship. Stockbrokers, investment advisors and CFPs are all required to pass examination and obtain licensure or certification. Stockbrokers, investment advisors and CFPs all owe their client legal duties, although these duties vary from one category to another. The presence of these titles does not negate the possibility of fraud, misconduct or negligence, but the designations are worthy of consideration.

The absence of one of these designations is also a matter worthy of consideration. Does the investment professional have any specialized knowledge; did he study finance at NYU and hold an MBA from the Wharton School of Business or did he drop out of high school and spend the past five years working in a restaurant? Has he successfully managed millions of dollars in accounts previously, or is the client the first opportunity to try out what he learned online? Does he have a criminal record? Is he connected to a brokerage house that will stand behind his advice or does he trade online with a discount broker using the client’s trading credentials?

Certainly, high school dropouts can be wildly successful at trading on the stock market, and highly educated and experienced people can be incompetent or become corrupt, but the client should investigate the investment professional thoroughly.

C. Things to Watch Out For

1. Who is the investment professional?

Know your investment professional. Know his or her professional designation and obligations to you. Know his or her background and experience. Know how the investment professional researches stocks, bonds and other investment opportunities. Know the brokerage firm with whom the investment professional is affiliated. Beware of “unaffiliated” investment professionals.

Some investment professionals are competent, experienced, dedicated professionals who seek the best interest of their clients. Others are simply salesmen who will sell anything they can just to make commission from a sale. Some previously honest professionals find themselves under tremendous financial pressure and respond by churning accounts or placing their clients in inappropriate, high risk investments that produce higher commissions. When the investment is lost, it is the client who suffers.

The Wolf of Wall Street provides an interesting look into the world of selling securities. The movie portrays the career of Jordan Belfort, who was a legitimate stockbroker early in his career. Eventually, he created Stratton Oakmont, a sophisticated sounding name, and built a nearly one billion dollar brokerage firm on essentially valueless penny stocks. Although the movie focuses on the Belfort’s lifestyle, the real lesson for the investing public is that the only skill possessed by the stockbrokers portrayed in the movie was the skill to sell investment. In the end, Stratton Oakmont’s investors lost nearly $200,000,000.

Make sure there is substance behind the investment professional. Do not fall for a smooth sales pitch from a professional sounding guy who uses big words and complicated concepts to sell you something you do not understand.

2. “If it sounds too good to be true, it is”

I used to say “If it sounds too good to be true, it probably is”. The problem with this saying is the use of the word “probably”, it allowed too many people to believe that their investment professional was an exception to the rule. The markets and the stocks that comprise them, move up and down based on a variety of factors. It is virtually impossible for any investment professional to always be correct in recommending stock purchases. Therefore, whenever any investment advisor purports to consistently produce significant returns, there is a problem. In the 1920s, an investment professional from Boston, purported to be able to earn 50 percent profits in 90 days from legitimate investments. Investors flocked to the investment professional seeking huge rewards but in the end, they were left with nothing. The only enduring legacy of that investment advisor is the use of his name, “Ponzi” which is used to denote a certain type of fraud. Unfortunately, the Ponzi scheme did not end with Charles Ponzi.

More recently, Bernie Madoff, former President of NASDAQ, was able to maintain a Ponzi scheme for over 20 years. Like many investment professionals, Madoff relied upon a trading system that was too complicated for most people to understand, but he provided returns of about 10 percent per year to lull investors into a sense of confident. Even when the stock market lost 38%, Madoff was still miraculously able to produce a return of over 5 percent. Unfortunately, there was no money to back up the returns and no trading system in place. As in all Ponzi schemes, he took money from prior clients to pay clients who were withdrawing funds. He now sits in a federal prison, but that is probably little to no consolation to his clients who lost tens of millions of dollars.

There is no legitimate investment that returns an unreasonable high rate of return. If an investment advisor promises a high rate of return or indicates that in the past he or she has had consistently high rates of return, further investigation is necessary. It may be possible to invest a dollar in a lottery ticket and receive $1,000,000 in return, but lottery tickets are not investments and the returns will not be consistent, or at least not consistently high. An investor focused on lottery ticket type winnings, will likely consistently lose everything.

3. Beware of Exotic Investments

The vast majority of investment professionals focus upon stocks, bonds and mutual funds. These types of investments are typically easy to understand, and the investor can check the markets to see the value of his investments. Some investment professionals venture into the areas of stock and commodities futures, other forms of derivative trading and the use of margin accounts. These investments are normally only suitable for a small class of investors and should be avoided by investors who do not understand these complex investment vehicles.

Still other investment professionals invest upon limited partnerships, real estate investment trusts and other forms of investments that are even more complex and difficult to understand. The most aggressive investors focus upon things like gold mines in Ecuador, condominium development in Peru or tourism development in Mozambique. Many of these investment schemes are unregulated by any government authority. Some are absolute frauds, i.e., “there is no goldmine in Ecuador”. Even if the opportunity is quasi-legitimate, there are usually geopolitical risks that make the development of the opportunity untenable.

Professionally prepared brochures, testimonials from previous investors and a sincere explanation from a guy in a suit who has “been there” are frequently enough to overcome normal suspicion. If you are familiar with geology and understand Ecuadorian environmental laws and indigenous rights, you may be in a position to begin to understand the investment opportunity. If not, do not do it. If you have your heart set on investing in gold mines, invest in the stock of one of the major international mining companies; at least then you know what you are buying. Also, for the record, the mining sector has not performed exceptionally well over the past five years.

4. Seek Independent Advice Early

Perhaps the best piece of advice I can give is to seek independent advice early. If you receive statements that do not make sense, if they contain margin accounts, loans or other derivative activities, go to someone other than the investment professional to have them explained. If account statements from brokerage firms do not match what the investment professional has been telling you, seek independent advice. If you lose 20 ,30 , or 40 percent of your retirement or investment account, do not rely upon the explanations of the investment professional who caused you the loss—if you do, you very well may lose all of the investment.

Most people faced with unexplained losses or other confusing documents will call the investment professional to find out what happened. Psychologically, no one wants to believe that they have retained someone to manage their affairs who is incompetent. They will want to believe what the investment professional says, especially if he or she says that all is well. The problem is that if all is not well, then further damage will likely occur.

The best course of action when faced with a serious question is to contact a professional that is knowledgeable with investments and investor rights. There is an organization called the Public Investors Arbitration Bar Association (PIABA) that is comprised of attorneys who practice in the area of investment fraud and misconduct. They will be able to review transactions, frequently at no charge, to determine if fraud or misconduct has occurred. They can also recommend a course of action to recover loss. There is nothing to be lost by calling a PIABA member and discussing the situation you are currently facing. PIABA’s website is, where you can find an attorney who can assist you.

There are investment professionals who are dedicated professionals with years of education and experience. There are also incompetent investment professionals, fraudsters and others whose only skill is selling. They sell themselves, not their products. The difficulty is in knowing the difference. An investor or potential investor can start by knowing the professional qualifications of the investor. Understanding exactly what it is that he or she does and listening carefully to the sales pitch. If it sounds too good to be true, it is. If you do not understand the investment, do not do it. Finally, if you detect a problem or things just do not add up, seek advice from an independent source early on.

No one can completely protect themselves from possible losses, but they can mitigate certain foreseeable risks. Always remember, If a problem does arise, there are things that can be done.