Why do advisors shoot themselves in the foot?

Why do advisors shoot themselves in the foot?

Why do advisors shoot themselves in the foot? The following article is an opinion piece written by Sean Harrell, Partner & Senior Advisor at Howe, Harrell & Associates

With all the hot topics like CRM2, the potential of a ban on embedded mutual fund commissions and the recent ban on DSC’s by Investors Group, most advisors aren’t afraid to speak out about how they are getting the short end of the stick.  Why is it then that advisors seem to keep getting in their own way? If it were up to advisors, we would be self-regulated.  As an advisor I would love this option but with the way some advisors run their practices I completely understand why the general public, the CSA and other regulatory bodies are concerned about our industry.

Last week I came across an example of why we need to do something to better our industry.

A non-registered transfer form came into our office to transfer money out to another institution.  It was for a client that I have worked with for 10 plus years. I know him well.  It happened to be for an account that had a decent size capital gain on it and the Transfer Form indicated the transfer was to be processed in cash.  I called the client to ensure he was aware he was going to pay tax on the gain of his account in order to transfer his money to the other institution (and I wanted to find out why he was moving his money). 

It ends up that he was not aware of the tax consequences, the other advisor made absolutely no mention of any tax consequences.  After discussing this with the client, he decided not to transfer his money out. Near the end of our conversation I asked the client why he was going to transfer his money away from our firm. The answer? The other advisor had promised him a better return and he wanted to consolidate his assets.  We ended up moving a decent amount of money into our firm after everything was said and done. 

How can we put a stop to these examples of poor advice? Why would an advisor do these things?  And at the same time, why is our industry still wondering why we are struggling to prove that we are professionals? 

I truly believe we need to do something to better the image of our industry. I hope one day financial advisors are thought of the same as lawyers and accountants. Will banning commissions make things better? That’s debatable. Will tougher entrance requirements to the industry help?  I think they would, even though when I first started 17 years ago I had absolutely no qualifications, so that makes me a hypocrite.  

I would like to see regulators reach out to successful advisors who run honest practices to discuss how we can make or industry honest and noble; get ideas on how both sides can accomplish their goals.  In my opinion, if regulators and advisors cannot work together the issues will never be solved.

  • Brett S 2016-10-25 10:17:38 AM
    My goodness, does this ever ring a bell for me. In my practice, my firm and myself are trying to incorporate a solutions-based platform to help clients that otherwise could not do things for themselves. That's why we are hired by them. We provide full transparency of costs associated with doing business with us (giving the client a choice between traditional and fee-based compensation models), and rely on a well documented plan and regular intervals to check progress towards their goals.
    I can't tell you how many times I have consistently heard from clients that they have been approached by another institution promising better returns (or better yet, "if you had money in our fund, you would have made this amount"), all based on a 5 year track record of their 'flagship' fund. And yes, I've lost some clients who were forced to pay an exorbitant amount of capital gains taxes because they were persuaded to chase returns instead of following the plan that I had worked so hard to create for them.
    Case in point - a new client of mine who's son is 16 years old, have had their RESP at a bank owned institution. My advice to the client was to take all risk off the table immediately and lock in the gains they have had, and be sure that they know how much money they will have for their son in 2 years time. The advice they received at the other institution? "why would you want to do that, don't you know the price of oil is going up?" This is a true story.

    At the end of the day, we as honest, hard working and caring advisors should continue to provide exceptional advice and service to those that want and need it, one client at a time, and in due time, those happy and financially successful clients (because of our advice) will tell their friends and family about us and organically grow our businesses. I don't think I'm able to change whatever regulators are going to do, so I'll continue to work within my competency and within the rules and guidelines set out by the powers that be.

    Let's raise a glass to those of us that actually do good for people, and are rewarded by doing so. The bad apples in our bunch will soon be gone from the bushel, providing an even better opportunity for us that do things right.
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  • Kathy Your NetWorth Manager Fee only planner 2016-10-25 10:38:57 AM
    Quote : The advice they received at the other institution? "why would you want to do that, don't you know the price of oil is going up?"
    This is probably the same bank advisors who for the last 2 years have been telling people to fix mortgages because interest rates will go up soon.
    Why do they persist in believing any one can guess? Brainwashed by their big employer? Stupid? Arrogant? Most likely desperate to make a sale and keep their job or from being shunted down the grid.

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  • Barb Eh 2016-10-25 4:06:37 PM
    The willingness to cause a tax impact for a client is either due to a lack of advisor knowledge - and a problem -- or due to an advisor seeking unfair advantage -- completely unethical -- or because the firm of the advisor does not have a particular mutual fund on its shelf or the ability to deal in the relevant security -- a slightly different issue. In any case, it's best to look at a solution that avoids these problems altogether. There is an industry standard form (that in theory dealer and advisor associations have bought into and their members can tailor their own of course) that is based on the CRA transfer form (http://iiac.ca/wp-content/themes/IIAC/resources/76/original/Transfer Authorization for Registered Acts (E).pdf)and in all discussions I participated in this regard, the IIROC (and I think MFDA) dealer operations people expect virtually all transfers to be made 'in kind', that is, not converted to cash due to the negative impacts the author noted. So it would be reasonable to ask that this form be updated to minimize the risk of the wrong outcomes and reduce everyone's work (and, heck, it could even say something about being aware that promises of consistently higher returns should be investigated). The CRA should be asked to update its form to specifically have the client sign off that they have been made aware of and agree with tax implications. This would benefit good advisors and give investors greater before the fact protection (after the fact, they could go after their advisor to OBSI, MFDA, IIROC and their commission, but the best result is stopping the bad or sloppy behaviour before it starts.)
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