By A. Daniel Woska



            The object of your affection, your most precious property, the thing you have worked to accumulate for years is systematically and intentionally placed in the hands of someone who professes to be an expert in investing your property. The person has explained that he is a “Registered Investment Adviser” licensed pursuant to the 1940 Investment Adviser’s Act and someone who had to study for a very difficult exam.  He looks good, he sounds good, he explains he is investing money for hundreds of clients in one thousand different accounts. You have previously interviewed three other prospects and you are weary of the interviewing prospect and all these RIA’s sound the same and this one has a large office with nice furniture and a radio show as well as very plush furniture and surroundings so you say “OK, I will hire you to be my “Registered Investment Adviser”.


            A contract is presented that contains multiple pages and says it is an “Investment Advisory Contract” so it must be some protection for you.  You never consult with an attorney who is familiar with the narrowly practiced areas of “Securities Law” or  “Investment Law” to gather even a minimal understanding of the contract. You fail to call your CPA to discuss what this Registered Investment Adviser is proposing for you to do with your hard earned money before you accept his proposed investment portfolio.  Nope, you do nothing to better understand what this professional sounding person is getting ready to do with your money and to you.


            The truth is you have no idea, not even a rough understanding of what you should be asking  this Registered Investment Advisor.  You are so unsure of what technically is required to make appropriate investments that you are forced to rely on a third party to make the decisions. When a stock broker or a financial expert begins to talk about the fundamentals of an investment strategy you hear things that remind you of your last algebra, trigonometry or calculus class.  You were not fond of  those particular subjects when you took them 30 or 40 years ago and are even less interested in trying to embrace these complex mathematical functions today.


            This is the “Investment Understanding Gap” that produces billions of dollars in losses to millions of investors.  The average citizen of the United States of America has not spent a lifetime investing, they have spent a lifetime working and earning. The average American invests substantial monies with a Registered Investment Advisor, a Certified Financial Planner or a Stock Broker once in their lifetime, when they retire. Therefore not only are virtually all Americans financially illiterate but more than half are “sucker” for overblown charlatans who impose their appearance of success on the unsuspecting retiring man who has money, stock or stock options which have been accumulated over years of hard work to earn this money to live on in retirement.


            Remember one thing and it is one very important thing to remember: “If your Registered Investment Advisor, Certified Financial Planner or Stockbroker guide you into incorrect and risky investments they will disavow any responsibility 99.9% of time.”  Think about that for a minute you are turning over all your hard earned money which you cannot go back earn again, to a stranger who talks about things you do not understand and you believe you are safe for the long run.  You are not just incorrect, you are financially dead wrong.  These people will not cause you to die physically, but they nhave no reservation or hesitation in telling you you have died financially and that you need to save more money because you have been so foolish with your investments.


            So let me say it this way.  If you have loaded up the wheelbarrow full of money you have been hiding in your employers 401k or pension plan you are in serious danger.  If you tell the Registered Investment Advisor, Certified Financial Planner or Stockbroker that you are willing to take “any” risk with your money, you have now given this trusted advisor the right to lose all your money in exceedingly risky investments with impunity and then tell you when you ask for an explanation that “You said you wanted to take risk, you did and it turned out bad for you.”  They will never say “I made a mistake let me refund your money”, never.


            If you are even considering investing with a Registered Investment Adviser there are things you absolutely need to request to be reviewed by you and either a knowledgeable Securities Attorney or a knowledgeable CPA or someone with detailed understanding of  alpha, beta, asset allocation, the modern portfolio theory, standard deviation, correlation, morning star and index funds.  If the person you choose to talk to cannot easily explain these things to you, they will really n ot be much help in your analysis.  You should seek someone who understands the risk side of investments, the regulatory side of the Registered Investment Adviser world and someone who is not interested in selling you anything.


            Registered Investment Advisors, Certified Financial Planners and Stockbrokers may be wonderful, kind, caring, friendly and considerate people and know absolutely nothing about how to ask you the questions that need to be asked before proposing any type of investment portfolio.  These folks may seem smart and knowledgeable and still know nothing about proper asset allocation, modern portfolio theory or correlation.  These professional sounding people who wear nice clothes and drive nice cars are simply sale pitch men and women who honestly believe they can help you but actually have no way to accomplish real help in most cases.


            Let me use an analogy.  If you go to a dentist you believe he is trained and licensed to work on teeth, same with a doctor of medicine, same with a professional architect attorney or engineer.  When you you go to people for professional help you expect them to be professionally skilled. While there are certainly bad dentists, doctors, lawyers, engineers, and architects they have been trained and licensed in the practice of an area of the professional realm that required hard study of difficult concepts over many years of fulltime classroom study and years and years of additional graduate school studies and additional testing and then eventually the big test needed to get licensed by the state in which they practice.  Registered Investment Advisers, Certified Financial Planners are not required to do much more then attend some classes a few times a month and then take a licensure test like a real estate salesperson or an insurance salesman.  This is not meant to say that sales people are undereducated, it is to say watch out before you choose to invest your money with someone claiming to be a Certified Financial Planner because they may have little or no real appreciation of how to do anything but sell you a group of arguably diverse mutual funds and tell you that is asset allocation, and truly believe it in their hearts making their sales pitch to you even more convincing.


            Before choosing anyone to professionally invest your money please cautiously and humbly ask for the following information:


A copy of their most recently filed Form ADV. A current copy of a Full Legacy CRD on the individual advisor who is handling your money A list of all clients he and his firm are currently servicing, redacting the names for privacy purposes but to see how busy he is going to be while helping you A print out of the Financial Fundamentals and Risk Fundamentals on each mutual fund being proposed An overlap report on each fund which is proposed to see how many of the stocks held in each fund or the same stocks. A full understanding of  index funds and bond funds which are available A copy of the Fund Agreement between either he or the wire house and the fund company involved in each fund.  They have one and you are entitled to see it. Ask for a copy of the financial arrangement the Registered Investment Advisor has with the wire house in order to find out what you pay for you buys and sells and what the Registered Investment Advisor makes off of the same buys and sells. The name, phone number, e-mail and address of the compliance person responsible for auditing this particular Registered Investment Adviser. A copy of the most recent audit and the full audit file with all correspondence.



If your Registered Investment Advisor is still interested in helping you after these document ts are requested you may be making progress in your decision making.  If your proposed Registered Investment Advisor is unable or unwilling to produce any of these documents due to confidentiality problems you better tread lightly.  This type of attitude is likely caused by something and perhaps many things which the wire house, the mutual fund company or the Registered Investment Advisor want to keep from you.


      A Registered Investment Advisor is not just a stockbroker placing trades, he is your fiduciary who has to always, 100% of the time, put your interests in front of his own professional interests.  It is rare for a Registered Investment Adviser to grasp this concept due to all of the conflicts of interest which are typically part of their practice.  The Registered Investment Adviser will always have conflicts on the fees and commissions you pay to him and the funds he picks. The funds all charge different 12b-1 fees some higher than others.  There are funds that actually provide trips, parties and traveling seminars to Registered Investment Advisors in order to generate business.  Obviously there is no math involved in a decision to sell funds for a company that provides great perks for him and a significant other. These Registered Investment Advisor fiduciaries often have secret unknown financial deals with wire houses, fund managers, and even themselves.  For example, I am aware of a very popular and well known East Coast Registered Investment Advisor who actually charged clients a management fee on their personal cash account ts and thon the value of the personal stocks they simply placed in the account t he opened for them.  The clients never understood that not only were they not making money on this cash, he was charging them almost 1% annually to hold their cash.  Again, legally speaking, as a fiduciary, this person was supposed to put the best interests of the client in front of his own. Perhaps the most troubling aspect of this revelation is that this particular Registered Investment Advisor has 500 accounts and hundreds of millions of dollars under management in probably the exact same way.


      In addition to the questions above you must also consider the  regulatory side of the life of a Registered Investment Advisor.  Who is responsible for catching and weeding out the charlatans?  The first line of weeders are the compliance officers responsible for the actual compliance with the rules and the law by the SEC, NASD and NYSE.  Unfortunately this is a go along and get along business and when the charlatan is a big producer paying lots of salaries, the first line of weeders is willing to look the other way until the Registered Investment Adviser is caught by an arbitration panel in a case by a public customer.  Once the charlatan is exposed by the customer, things may change.


A. Daniel Woska
Plaintiff’s Contingency Fee Attorney

This entry was posted in Investment Advisor and tagged , , , , , . Bookmark the permalink.

Comments are closed.