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The Good, Bad and Ugly of Financial Advice

Financial regulations are  usually created with the intention of protecting the consumer and adding transparency to the decision making processes. However, the final results do not always match the initial vision. Although qualified investment advice may help investors avoid financial pitfalls, many individuals are now distancing themselves from this prepaid and often self-serving arena. The end result is that fewer people are seeking the services of professional financial advisers; indeed, less than one-third of all adults will consult a financial advisor.

ID-100135755Although some analysts believe that the reduction in the number of professional advisers is a good thing, others feel that the do-it-yourself tendency could result in dire consequences for those inexperienced in the financial industry.

One effect that this shift has had is in the way financial companies now communicate with potential clients. Unsurprisingly, many professionals are now learning to embrace the internet as a means to drive business forward and promote their services. It seems that online execution-only platforms may be the way of the future. In fact, the investment giant Hargreaves Lansdown now boasts a website that attracts more visitors in the United Kingdom than “The Times” or the “Post Office”. They have also adopted an iPad version of their newsletter and cater to thousands of Twitter followers each month.

Beware of Your Sources

Additionally, it may come as no surprise that garnering investment advice from social media sites has also increased in popularity in recent times. Many of those who follow the do-it-yourself mentality will utilise the knowledge base of the larger, interactive populace to help shape their financial decisions. Although this methodology is still in its infancy, some feel that the purchase of equities and deciding upon the correct investment fund may be the next logical step forward in the social media arena. But this can result in difficulties because you have no idea of the qualifications (or even identity) so you have to be sure to not follow this advice blindly.

Follow the Money

On the other hand commission based  advisors can often be lured more by the commission than by what is in the client’s best interest, so you need to be sure who’s side your advisor is really on. Depending on the type of arrangement you have with your financial advisor he may or may not have a fiduciary responsibility. A fiduciary manages the assets for the benefit of the other person rather than for his or her own profit and is therefore held to a higher level of accountability. Typically, a fiduciary relationship arises when one party places special confidence and trust in another, who then becomes obligated to act with due regard for the interests of the first party.

According to Cornell Law School :

A fiduciary duty is a legal duty to act solely in another party’s interests. Parties owing this duty are called fiduciaries. The individuals to whom they owe a duty are called principals. Fiduciaries may not profit from their relationship with their principals unless they have the principals’ express informed consent. They also have a duty to avoid any conflicts of interest between themselves and their principals or between their principals and the fiduciaries’ other clients. A fiduciary duty is the strictest duty of care recognized by the US legal system.

Unfortunately, not everyone who helps you invest your money is required to be held to this level of accountability, quite the opposite as many are actually commission based and thus profit when they sell you something, like a stock broker who may have the incentive to “churn and burn” i.e. convince you to constantly buy and sell stocks until your account is used up.

Up until recently, courts have been reluctant to impose fiduciary duties on banks in their dealings with consumers. Inside Counsel argues that the unfair, deceptive or abusive acts or practices (UDAAP) provisions in the Dodd-Frank Act will “change the nature of the relationship between financial institutions and their consumers, creating something more than an arm’s length business negotiation but less than a fiduciary relationship.” By contrast, “commercial duties” to put clients’ interests first and to avoid conflicts are much less strict than fiduciary duties. The minimum level of responsibility you should expect from a professional is no abusive, unfair, or deceptive practices. This includes a financial institution taking “unreasonable advantage” of the consumer’s “lack of understanding”. Even when reading articles on a site such as this one you need to read the disclosure to determine if the publisher may have a financial connection to any product or site promoted.

New Technology

It is obvious that financial companies and fund managers need to quickly adapt to a generation increasingly focused on mobile devices, business apps and real-time flexibility. No longer does this approach represent just a small portion of investors; rather this will be considered the norm in the relatively near future.

So, while the landscape of financial advice may be changing dramatically, the ability to acquire sound advice is more important than ever before. While companies continue to modify their practices to accommodate this growing trend, individuals need to avoid the pitfalls often associated with such a malleable environment.

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