When it comes to money you want the most competent financial adviser to help you grow your assets and provide you with income, especially at a time closer to your retirement. However, over the past few years hundreds of millions have been lost due to bad investment advice from greedy financial advisers who know very well that the products they promote are way too risky for average investors. The best product for you may or may not be the one that generates the highest commission for them, I have seen many investors blindly trust their advisers and buy a lot of low quality investment products that end up costing them a lot of money. It is important for you to understand that just because something is unethical doesn’t make it illegal, and the current regulations do not provide enough protection for you as an investor. It is, therefore, very important for you to know the common tricks.
Some private bankers even went as far as breaking the law to profit themselves. Take the case of Kevin Wallace, an ex-Merrill Lynch private banker who offered financial advices to many Asian tycoons and their families in the late 90s. Mr Wallace was a Harvard Business School graduate, a high profile banker accused of unauthorized trading and later sentenced to jail. Singapore’s high court found Mr. Wallace guilty of forging signatures and trading stocks without client permission. The incident was discovered by suspicious clients who complained to Merill Lynch that Mr. Wallace had told them that there was no need to look at the official documents from the bank as they were incorrect. Interestingly, none of the bank’s support functions such as risk management, operations, compliance and audit was able to detect the funny business before the clients made a formal complain which triggered a high level investigation.
Mr Wallace was asked to resign shortly after. Merrill Lynch later filed a case against him and the judge ordered a payment of US $25 million to be made by Mr. Wallace to the bank.
There are several common tricks that financial advisers play:
Trick 1: Offering financial advices for “free”
Good, experienced private bankers charge a service fee for conducting careful research and analysis. They would carefully review a client’s financial goal, investment time span, risk tolerance and special family needs before deciding whether certain portfolio strategies are appropriate. They would also disclose any conflicts of interests in the asset allocation process. Most advisers you meet out there, however, are only salespeople who get paid by the number of financial products sold. I would say about 60-70% of the advisers belong to this category. Because they do not get paid unless they are successful in selling certain types of products (often complex, risky derivatives), advisers would often recommend products that are inconsistent with your overall investment goal. The “free” advice you received often turn out to be very expensive as your portfolio loses tens of thousands of dollars.
Trick 2: The performance bonus trap…