Investors Beware

By Hannah Wallace August 31, 2007

It’s not uncommon to read stories about unethical financial advisers who use impressive-sounding credentials to woo clients and then misuse their clients’ funds. Just last May, the Florida Department of Law Enforcement announced it was investigating a Manatee County father and son who allegedly used an affiliation with a Bradenton church to defraud clients out of nearly $8 million in investments. Michael Traynor, 56, represented himself as a financial planner and certified college planning specialist and was a registered stockbroker and life and annuity agent, according to the FDLE. Michael Traynor, 28, had been associated with various financial firms and life and annuity insurance companies.

This sort of story makes Sarasota financial adviser and attorney David Sterling crazy. Sterling, who comes across a bit like Al Pacino’s idealistic, angry defense attorney in In Justice for All, has worked in the financial services industry for 20 years for major banks and investment firms. Last year, he hung out his own shingle, Sterling Capital Resources of Sarasota, to advise individual investors and their advisers.

But he’s also an advisory council member for an investor rights project, Pace Investors Rights Project, funded through the New York State Attorney General’s office, and has collaborated with the National Association of Insurance Commissioners (NAIC) for the review of Senior Protection in Annuity Transactions. He has also consulted with the NASD (National Association of Securities Dealers) and SEC regarding practice standards for the sale of insurance products.

His message for anyone who hopes to retire with a nice nest egg? Beware.

How has the industry changed in the 20 years since you started?

We are in the midst of a financial care crisis. It’s extremely competitive now. Financial planning is becoming more specialized. You’re seeing the growth of programs on college campuses that offer special degrees in various aspects of financial planning. There are so many providers of financial services and products that are regulated by such a wide girth of agencies, both state and national, that I’m not sure the investor is able to discern what is in his/her best interest. It’s become a ball of confusion for every investor.

What trends do you find most disturbing?

First, fear-based marketing. Companies are in business to make money. That’s understandable. However, I’m overwhelmed with the amount of material I’m reading on “How do you appeal to the emotional side of the investor?” I’m finding that social psychology is more important than expertise in investments and financial planning. Look at the seminars that appear…look where they’re directed. They’re playing on the fears of seniors and retirees.

I’m also concerned about the proliferation of credentials. A financial adviser can literally purchase with some level of home study a credential of being board certified in estate planning. [But] on the legal side, for an attorney to be board certified in estate planning, requires five years of practice, heavy coursework and a rigorous exam. [It’s easy] with minimal education, training and background for a financial adviser to broadcast knowledge that parallels what an estate planning attorney has spent considerable time earning, which brings me to a more disturbing and rarely discussed trend.

Annuities, long-term care policies, insurance policies, reverse mortgages and 529 Plans are becoming increasingly complex. Very simply, these are legal contracts written by attorneys with an array of contingency clauses and provisions that can compromise the goals of the investing public.

The problem? No one is reading these contracts. Advisers aren’t required to read the contracts governing the products they sell. I really don’t expect the public to “cozy up” in their favorite chair with a cup of coffee to spend a relaxing leisurely moment with their recently purchased annuity contract. If you think for a moment that financial advisers are qualified to address these issues, think again.

You’re not saying that all financial planners and advisers are unethical?

Not at all. But doing the right thing is not always easy. In my experience it’s anything but easy. The common question I get is how do I know whom to trust? My response is this: It takes work. Unfortunately, as human beings I see an inclination to follow the path of least resistance.

Doesn’t the industry regulate itself?

The industry is going through that debate, asking, what is the standard of care that should be provided to investors? So many financial providers are governed by different rules. A representative who works for a broker/dealer, more commonly known as a broker, is for the most part, held to a suitability standard of care. The broker represents two parties in this case: the client and the firm he or she works for. A financial advisor who is a registered investment advisor is principally governed by the SEC and is held to a higher standard of care—the fiduciary standard of care. The fiduciary standard means that the best interests of the client must come first. Whether those interests are properly served is another matter altogether.

Regulators often seem more concerned about turf and ego than serving investor interests. However, more disturbing is the trend of advisers to seek the most friendly or less obtrusive regulatory umbrella. For example, advisers can do quite well pushing fixed and equity-indexed annuities, which merely requires a life insurance contract.

Some financial planners say the profession is burdened with so much unnecessary paperwork that they have to hire additional staff to satisfy all the new regulations.

I put those complaints in the category of excessive whining.

How should investors protect themselves?

If the investor is not wiling to do what it takes to increase the odds of being properly served, how do we shift the responsibility to the industry?

If you’re a business owner or individual investor it’s easy to get caught up in the day-to-day struggle, and it can be extremely challenging to look beyond five years down the road. I’ve talked to other attorneys and accountants about this. If there’s one failure it’s not asking: Where am I headed? How will I know that I got there and how will I exit?

Business owners also need to ask: Who am I going to rely on to help guide me in my financial, tax and legal matters? What is the caliber of my advisory team? Good advice costs money. What criteria am I going to use to evaluate? Business owners are approached daily by financial advisors. Unfortunately many of the financial products offered by these advisors are presented in a way that allegedly eliminates the need for an accountant and an attorney. It’s best if you take a team approach. You need good-quality financial advice, legal work and tax work.

Also, I highly recommend that business owners and retirees read The Wright Exit Strategy, by Bruce R. Wright.


I have confirmed the professional qualifications of my current advisor with reliable third-party sources. This should not include your referral source.

I know exactly how my advisor is compensated and I receive full disclosure for each transaction or service arrangement. No assumption is made about one form of compensation versus another. It’s about disclosure, motives and objectivity.

My advisor is appropriately licensed to represent a broad array of financial products and services—individual securities, asset management, and insurance. Some advisors can only sell you certain products; consequently, your needs and solutions are defined and restricted by what that advisor can offer.

I prefer simple and brief when considering financial or investment proposals. Simple and brief are the foundations of sales presentations; not appropriate for the delivery of qualified counsel.

My advisor is quick to recommend outside counsel from attorneys and accountants when the need arises. This is one of my favorites. First, many advisors view attorneys and accountants as “deal killers.” Second, many advisors market products on the premise that these products eliminate the need for legal work. Third, many investors abhor paying attorney fees, even while they line the pocketbooks of financial advisors and agents. Finally, it is fair to question whether your advisor is qualified to detect the need.

I am uncomfortable with change. Most of us are, but consider this. It’s often easier to place our confidence with advisors who have been doing us a disservice for the past several years than it is to take action with professionals who are new and unfamiliar to us.

I know I should read the contract before I sign, but the thought of doing so is painful. Anyway, it’s too complicated. You’re not alone. It’s highly likely that your advisor has not read the contract to that annuity, life insurance or long-term care policy, reverse mortgage, or 529 plan you recently purchased. Would you sign a contract if you did not know the terms? Absolutely. Are you at risk? Probably.

It’s possible that my current advisor or financial firm may not be serving my best interests. Some advisors are not qualified to serve your best interests or not compensated accordingly. Then again, some advisory relationships are too emotionally bound making separation seem impossible. These considerations may be costing you much more than you can imagine.

I just might not be that serious about my financial well-being and getting the right help. It takes work to be a good steward and we all know the story about the cobbler’s family.

Dave’s Top 5 List of High-risk Transactions.

Equity Indexed Annuities a/k/a Fixed Indexed Annuities. It’s not the product per se; it’s the way the product is promoted, sold and applied, and by whom. Is there a role for these products to play? Often. Are these products oversold? Almost always. Do investors understand what they’re buying? Never.

Variable Annuities with Payment Guarantee Features. The tidal wave of product sales is just hitting the shores, and investors as well as their legal and tax advisers better be on guard. These contracts are as complex and confusing as it gets. I am seeing a rash of these contracts held within investors’ revocable and irrevocable trusts. Nothing like a complex contract within a complex legal arrangement. Watch the lawsuits ensue from these sales.

Reverse Mortgages. Inappropriate sales of reverse mortgages might overtake annuity debacles. These products can play an important financial role, but the potential for abuse is enormous. Once again, it’s the promotion; not necessarily the product. Sleeze seminars are hitting an all-time high. When a reverse mortgage “expert” can sell this product to a frail 94-year -old, something is amiss.

The Life Insurance Panacea. Similar to the annuity, it’s often touted as the universal cure-all. Whether it’s converting a municipal bond portfolio, IRA or annuity, the end result is always the purchase of insurance. Are these strategies inappropriate? It depends. It’s all about how client needs and preferences are determined, who is making that determination and what eventually will serve the client’s best interests.

Long-Term Care Insurance. A word of caution: Some advisers are limited in the number of firms they can represent. How can a firm that prides itself on financial planning restrict adviser access to one insurance provider? Enough said.

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