It’s about the last thing any financial advisor wants to deal with.
When interaction with a new client reveals possible indiscretions on the part of a former advisor or even a current one there are appropriate steps that can be taken. FINRA (Financial Industry Regulatory Authority) focuses on applying high ethical standards through its rules, and this approach certainly can benefit a client as well as an advisor.
The most common scenario is uncovering apparent negligence or incompetence through over-concentration in one sector or type of financial product, or a strategy that’s clearly ill-suited to a particular investor, or selling an annuity product that just happens to come with a massive commission.
As an example, a situation might play out with an elderly retiree let’s call her Mary and her middle-aged son, we’ll call him John, contacting a financial advisor to manage Mary’s assets. Mary had worked previously with another advisor, but John was dissatisfied and convinced his mother to look elsewhere for professional guidance.
So Mary’s new advisor, who we’ll call Bob, has an initial meeting with Mary and John to get their input on general goals and direction. Then, he sits down with all the information provided to him and begins his analysis. Rather quickly, he notices multiple red flags.
First, he sees that Mary has a significant amount of money far too much, in his opinion tied up in funds from a single firm. And it doesn’t take Bob long to realize that the firm in question happens to be the one employing Mary’s previous advisor. Clearly, despite the fact that these funds were inappropriate for Mary’s particular needs, her previous advisor was steering her money there, and almost certainly earning sizable personal commissions in the process.
The facts and figures spread out before Bob don’t lie, and in his opinion, Mary was likely victimized by a financial professional. And now, Bob must decide on a course of action.
The challenge is that, in a case like the one in which Bob finds himself embroiled, many advisors feel skittish suggesting that another member of their profession made serious errors or perhaps is even criminally liable. But I recommend taking what’s often called a principles-based approach and addressing the matter promptly. From my perspective, if someone did indeed do something wrong and some or all of the missing funds are ultimately recovered this forthright approach can go a long way toward bolstering a client’s trust.
If past or ongoing negligence seems likely, I suggest that financial advisors encourage clients to reach out either to an experienced securities arbitration attorney or an appropriate regulatory or government agency. And if a client elects to take this step, they should be made fully aware that a regulatory agency is primarily focused on discovery of wrongdoing and enforcing applicable laws, while a private attorney’s role is representing and protecting a client’s best interests.
All things considered, any financial advisor who’s working with a new client and stumbles upon serious improprieties on the part of someone who was or still is representing that same client has serious decisions to make. But if an advisor is charged with managing someone’s finances or investments, and there’s even a hint of possible irregularity, the wisest move is immediately shining a bright light on the situation. After all, the alternative might be to say nothing, and later have to answer some extremely awkward questions, when the client or a third party uncovers the wrongdoing.