When a fellow advisor goes bad

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.

See also:

• CSI: Bad advisor edition
• An advisor’s code of ethics
• The truth about politicians (and the rest of us)