Rights and Responsibilities of Investors

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The Bernie Madoff case is just the most recent high profile instance of investor fraud that is triggering a cycle of emotions. It’s truly astonishing that so many people have been impacted by so many fraudsters. I clearly feel sorry for those people who got taken and also wonder if they were ever suspicious about the outsized returns and the lack of clarity around the investment process. I get angry upon hearing how feeder firms either failed to perform proper due diligence or overlooked the obvious and now claim to be victims themselves. I cringe, but understand, when investors imply with their questions that others may not be trustworthy because a few in the industry have cast a shadow over my profession.

I recently read a piece by Mark Tibergien in Investment Advisor that I’ve edited for you. Mark is CEO of Pershing Advisor Solutions, one of the leading custodians for RIA assets, and is a former partner in Moss Adams LLP.

The canvas of this landscape, of course, is painted with multiple shades of gray. Investors hire advisors to guide them through complex financial decisions. Boards of non-profits outsource to investment consultants. Widows who have never balanced a checkbook seek handholding and direction from trusted financial professionals. Artists and actors delegate financial decisions to people who perform the role of business guru so that they can concentrate on their crafts. The whole point of hiring an advisor is to engage an intermediary, a guide, to do what a layperson doesn’t or can’t do well.

But does this mean the investor client should abdicate all responsibility? Wouldn’t they take action to understand nutrition and exercise if their doctor said they were morbidly obese? Wouldn’t they try to understand their child’s learning disability if he fell behind in school? People must frequently make decisions and take action on things they know nothing about. Why is understanding where their money is going and what their advisor is saying any different?

It is true that we seem to be living in a world where the obvious somehow becomes fodder for litigation and blame throwing. A recent blog cited frivolous law suits that have resulted in ridiculous warning labels like:

• “Remove child before folding,” on a baby stroller.

• “Harmful if swallowed,” on a brass fishing lure with a three-pronged hook.

• “Never iron clothes while they are being worn,” on a household iron.
• “Shin pads cannot protect any part of the body they do not cover,” on shin guards.

All of this raises the question: What is the investor’s responsibility to minimize the risk of fraud or failure in the management of their account? The Madoff affair has elevated the question of whether the markets are fixed to work against ordinary folks. Multiple other incidents continue to reinforce the impression that the financial services industry is out of control. It’s maddening that while many are keeping their nose clean, others are sullying their reputation by association.

Blame and Responsibility
This tension around whom to blame got Mr. Tibergien thinking about advisors helping investors to understand their rights and responsibilities in the management of their money. Yet how can this discussion occur at a time when investors are wounded and wary without the advisor coming off as trying to shift accountability?

Recently, Mr. Tibergien was asked to talk about this subject for the PBS television show “Consuelo Mack WealthTrack.” With the help of readers of the newsletter Inside Information, and input from members of the elite cadre of advisors in the Alpha Group, he pulled together some advisor/investor client communication ideas. One of those ideas is to provide investors with a “Bill of Rights and Responsibilities” as part of the engagement process. This document would outline responsibilities and expectations for both parties.

Investors’ Rights
Here’s how an Investor Bill of Rights might read:

As someone seeking advice from a financial planning and investment professional, you have the following rights:

• To know the credentials and relevant experience of your advisor and her team.

• To know the compliance and disciplinary history of your advisor and his associates, including relevant problems in their past such as: personal bankruptcy, poor health that may impair their work on your behalf, business history, and financial strength.

• To know your advisor’s processes and protocols for developing her recommendations and executing their strategies on your behalf.

• To understand your advisor’s investment philosophy and to expect that he can communicate it in a way that you can comprehend and even recite back to them.

• To understand all the fees, charges, and expenses charged by your advisor, by the funds she uses, and the cost of execution.

• To know whether your advisor uses an independent clearing firm if affiliated with a broker/dealer, or an independent custodian if a registered investment advisor (RIA).

• To receive printed or electronic confirmations from the independent custodian of every transaction of money or assets into and out of your account, and to receive statements summarizing activity in your account at least quarterly.

• To know if your advisor is receiving extra fees or compensation from her custodian including 12b-1 fee rebates, or “soft dollar” payments for doing business with them; or in the case of broker/dealer affiliated advisors, to know whether the registered representative (broker) has received a signing or retention bonus to affiliate with a particular firm. To have these terms explained to you in the context of how they could influence the advisor’s work with you as his client.

• To receive regular communication from your advisor on the status of your account, status of activities that your advisor is committed to, and other relevant developments.

• To be provided with the contact information of other investors as references.

Investors’ Responsibilities
The counterpart to having rights is having responsibilities, too. Here’s how a Bill of Responsibilities could read:

It is my responsibility as your advisor to be completely transparent about how I do business with you. I will develop and implement recommendations and follow the protocols that we have described to you, and will charge appropriately for my services. I am here to guide you based on my professional experience and education, but ultimately you must be both comfortable and clear about what I am doing on your behalf.

The following is a Statement of Personal Responsibility. It is your responsibility:

• To ask for explanations on any recommendations that you do not understand.

• To not authorize execution of the recommendation if you do not understand how it works, how it will benefit you, or what the risks are.

• To look at every “confirm” and statement you receive from the broker/dealer or custodian and to reconcile those statements with any performance reports that your advisor provides to you independently. You may choose to engage a CPA, bookkeeper, or trusted person separate from your advisor to perform this reconciliation.

• To understand and agree with your advisor’s investment philosophy or to seek another advisor if you do not agree or understand.

• To not allow investment of all your assets with a single money manager or fund.

• To evaluate your advisor not just on performance but on his ability to listen, communicate, and respond to your concerns, and to change the relationship if it is no longer acceptable.

• To understand your tolerance for risk and your own relationship with money.

• To question why returns are much greater than the market averages as vigorously as you might question why your returns are below a reasonable expectation.

• To challenge fees that were not agreed to in advance and to evaluate whether you believe you are receiving value for what you are paying.

• To not give full discretion for the management of assets, or to give a Power of Attorney over the assets, to the same person who is responsible for executing the transactions.

This is not a complete list of items to include in a Bill of Rights and Responsibilities for investors, but an example of how investors can assume control of their financial lives.

Though it is likely we will see changes in regulation that will attempt to shore up weaknesses in our system and better protect investors, it will be impossible to totally prevent investment abuse without better vigilance by investors and their other advisors including accountants and lawyers. Investors should always know their rights, but they should also understand their responsibilities as well.

Craig Narum, CFP® is a Principal of Trisperity Wealth Advisory Group in Katy. Trisperity helps people protect, grow and give (to loved ones) their financial wealth. He can be contacted at 281-693-3777, or through This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Craig Narum, a local member of FPA.

Staff Writer

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