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Why Do Financial Advisors Shoot Themselves in the Foot?

Written by: Sean Harrell

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.