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Spotting Advisor Malfeasance Part 2: Watch for These Red Flags


Working with an advisor is a good solution for many physicians. But as with all things investing, there are some things to monitor that may help you assess whether the professional you're working with is the right professional for you.

Chart and magnifying glass

In Part 1 of this series, we covered advisor missteps that should raise a red flag and trigger a more in-depth review of the advisor’s performance and/or conduct. Among those was not learning or adhering to your investment goals, talking down to you or your spouse, and being vague about how fees and commissions are structured. As I noted in that article, working with an advisor is a good solution for many physicians. But as with all things investing, there are some things to monitor that may help you assess whether the professional you’re working with is the right professional for you.

Putting Their Interests Before Yours

As I noted previously here, advisors who aren’t fiduciaries don’t necessarily have to operate with full transparency and put the best interests of their client—you—ahead of their own. Many are only held to a standard of “suitability.” Know to which standard your advisor is required to adhere. If it’s a suitability standard, look for some common signs that investments your advisor is suggesting may be benefiting him or her more than you.

• Churning, or excessive trading, is a way for an advisor to earn commissions through a high volume of trades. While a high degree of activity may look like churning, it may simply be an advisor strategy that does indeed benefit you. How can you tell? Talk to your advisor. Ask him about the necessity of the number of transactions. Ask him to show his rationale for making the transactions. Ask for the results. Most importantly, make sure the rationale you’re given matches up to your expressed investment goals.

• Secrecy about returns or performance. An advisor who out-performs the market on every investment vehicle is either the best advisor ever or a criminal. Not even experienced investors like Warren Buffett win on every investment. The best advisors are up-front with you about investments that did not perform as well, and they can typically articulate why and what action they’re taking to get you into better-performing investments.

• Pushing products or services excessively. If your advisor keeps bringing up the same opportunity, over your objections or your goals, it may be that she believes so strongly in it that she doesn’t want you to pass it up. It could also mean that she may stand to benefit by drawing investors to that vehicle. Good advisors are good listeners.

• Always agreeing with your financial choices. This sounds counterintuitive, right? You are the primary decision-maker, after all. But an advisor who simply follows directions is an administrator. A good advisor will likely disagree with you on some investment choices you make, and he or she should raise those objections with you and be able to articulate the reasons behind those objections. You may ultimately plow ahead anyway, as is your right, but an advisor who simply nods at all your strategies isn’t providing very much value.

A Final Word

The majority of financial advisors working with individual investors want what’s best for their clients. Very few are out-and-out criminals. But some are, and others may be misguided, or just not very good. Working with any sort of partner or advisor, whether in medicine or finance, has to involve a certain degree of trust and communication. Those two things feed off of one another. Communicate regularly with your advisor, encourage them to do the same, and that needed level of trust will have been earned.

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Victor J. Dzau, MD, gives expert advice
Victor J. Dzau, MD, gives expert advice