Bernard Madoff: An anomaly in the world of financial advisors. (Photo credit: Wikipedia)
Sometimes, the bad guys aren’t the bad guys. Financial advisors are widely distrusted since the economic meltdown and the Bernie Madoff scandal, polls say.
But surprise: Other surveys show that those investors who use advisors trust them a lot. Plus, complaint levels about advisors are lower than those for lawyers and doctors.
Only 3% of financial advisors receive serious complaints during their entire working lives. Compare that to attorneys (an average 8% of them get complaints each year) and doctors (5% are sued yearly).
As America and the world teeter on the edge of yet another possible downturn, it pays to know who can guide you through. Just as every player needs a coach, it helps to have a knowledgeable advisor.
Advisors get bad press from the financial crisis. As the public face of the financial services industry, they took the lion’s share of blame when investors’ assets disintegrated. Joe, the broker on Main Street, sold them the securities that collapsed, not Lehman Brothers’ Dick Fuld or Countrywide’s Angelo Mozilo.
Advisor Madoff’s shenanigans were epic in scope. Other skeevy advisors came to light in the crisis’ aftermath, such as Nicholas Cosmo, who sold fake investments to the gullible. These horror stories only deepened a simmering dislike for advisors. Hollywood, alert for a villain, has begrimed advisors for years in such movies as “Margin Call” (2011) and “Wall Street” (1987, the year of a previous crash). Baby boomers won’t forget the (now-banned) dinnertime cold calls from brokers pushing the latest hot stock.
According to a survey by the Cerulli Associates consulting firm, at least half of U.S. households do not use a financial advisor, broadly defined as a stockbroker, a fee-only planner, a bank trust officer or an insurance agent. Odds are that many of the people who disdain advisors come from the half without one, given that the clients are largely happy with their advisor.
But look at some polls and advisors come across as something akin to the misbegotten progeny of a marriage between Darth Vader and Cruella Deville. A 2012 survey from public relations giant Edelman finds the financial sector ranks lowest of all industries in public trust. Fancy that, even below politicians. Another 2012 poll, from the Chicago Booth/Kellogg School, says only 22% of Americans trust the nation’s financial system.
Trouble is, the public at large doesn’t know a lot about personal finance, risk management and the plethora of financial products. According to the RAND report, commissioned by the Securities and Exchange Commission and published in 2008, only 10% of investors view their investment knowledge as “good or advanced.” Even investors self-described as “affluent and financially sophisticated” do not know the ins and outs of the financial industry.
To most people, finance is a miasma of confusing jargon. Lost on them are the distinctions between types of advisors such as Registered Representative and Investment Advisor Representative, between Certified Financial Planner and Certified Financial Analyst, and between firm types such as Broker-Dealer and Registered Investment Advisor.
A disclosure: I swim in this pond, in a sense. I’m the editor-in-chief of a new financial Web site, AdviceIQ.com, which produces a list of advisors nationally who have no disciplinary actions filed against them. Once they’re certified as clean, we rank them locally by their specialties (divorcées, newlyweds, rich folks, etc.) and publish their insights.
What’s more, it’s telling that most advisors get high marks from those who know them best. After taking a poll, John Hancock Financial reports that 82% of investors who use advisors have a high level of trust in them. Another survey, from Charles Schwab Corp., performed by Koski Research, shows that 48% of investors use the term “trust” when asked to describe their advisor.
The RAND report found that 70% of clients agree or strongly agree with this statement about their advisor: “I am very satisfied with the service that I receive from this individual; I trust that this individual acts in my best interest; I believe that this individual provides me with a valuable service.” Not too shabby.
When looking at complaints filed against financial advisors, judging by the public distrust, you would expect a number vaulting into the ionosphere. But complaints are quite low. And better than those of doctors and lawyers.
Why compare advisors to doctors and lawyers? All three professions deal with arcane stuff that is vital to our existence. And we need to trust them. Try removing your own spleen or representing yourself in court – or running your own Monte Carlo simulation to judge whether your investments will last through your retirement.
While not every dissatisfied person files a complaint, the ones who do – whether investors, patients or law clients – are a good measure of how bad things are in these professions. If anything, investors have more opportunity to complain, since there are two national bodies overseeing advisors, and two in each state (insurance and securities regulators). Lawyer complaints go to state bar associations, and doctor complaints are in the form of lawsuits.
The statistics are telling. AdviceIQ proprietary research found that 3% of all persons in the brokerage, advisory and insurance fields have received a serious formal complaint during the course of their careers. Overall, 7% have received some kind of complaint. There is a big difference between the serious complaints (“My advisor put all my money into Galapagos tortoise futures, and I lost everything”) and minor ones (“My stock portfolio went down 5% last year when the market went down 7%”).
Advisor complaints are over careers that can be 30 years or more. Compare that to the complaints against attorneys, as logged by the American Bar Association, and against doctors, per the American Medical Association. Annually, 8% of attorneys receive complaints and 5% of doctors are sued. That’s not for an entire career, but for one year.
That’s not bad for advisors.
Larry Light is editor-in-chief of AdviceIQ.com.
