2 June 2020

Americans Have Some Disturbing Misconceptions

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Nearly a third of Americans think that financial advisers are likely to rip off their clients.

But it’s OK, because they also know it won’t happen to them.

Those are the dismal findings of a new survey conducted by online money management company Personal Capital. In its 2019 poll of 2,000 investors, the company found that 30% think a financial adviser “is likely to take advantage of a consumer.” But 97% trust their own financial adviser to act in their best interests.

“It’s always somebody else” who’s getting ripped off, says Jay Shah, Personal Capital’s CEO.

Logically, it can’t always be somebody else. But people are suckers for an engaging personality, some plausible patter, or a shoeshine and a smile. It’s not how we rationally should seek advice, but it is. (Medical experts note that people tend not to sue doctors with a good bedside manner)

Scammers are out there 

The survey comes in a week when two financial advisers — a father and son — were convicted in Birmingham, Alabama, for scamming clients out of $10 million. Former basketball star Charles Barkley was among the victims of Donald Watkins, Sr. and Donald Watkins, Jr. Barkley says they took him for $4 million. “We disagree with the verdict but this is the way the American jurisprudence process worked so we will continue our fight,” Watkins Sr. said, according to AL.com. 

And the survey also coincides with the news that the radio figure known in the Dallas area as the “Money Doctor” has been shut down and charged by federal authorities with running a Ponzi scheme that scammed his elderly customers.

William Neil “Doc” Gallagher, who once wrote a book called “Jesus Christ, Money Master: Four Eternal Truths for Personal Power and Profit,” hosted retirement planning programs on local radio in the Dallas area. He said he had a “mission” to be “a vehicle of God’s peace and comfort to as many people as possible, helping first with their financial peace of mind, then also with their spiritual, emotional and family well being.” He sold “guaranteed income” products to people in their 60s and older, says the SEC.

From 2014 until earlier this year he raised somewhere between $19 million and $29 million, the SEC says. Today: There’s just $821,951 left.

Gallagher could not immediately be reached for comment.

Financial planners who are accused of fraud are reasonably rare. But as Personal Capital’s survey shows, many Americans are oblivious to other, perfectly legal ways some in the industry may be taking them for a ride.

Advisers aren’t always required to act in their clients’ best interests 

For example, 48% believe that all financial advisers “have a legal obligation to act in clients’ best interests.” But that belief is simply not true, note industry experts.

This so-called “fiduciary rule” applies only to so-called Registered Investment Advisers, typically registered either with the Securities & Exchange Commission or state regulators. The North American Securities Administrators’ Association, which represents state regulators, says in total there about 350,000 so-called RIAs in the U.S.

There are almost twice many financial advisers who are not subject to this rule. Financial salesmen and representatives regulated by the Financial Industry Regulatory Authority must simply ensure that the products or investments they recommend are “suitable” to the client. That leaves a wide area for potential mischief. FINRA says there are 650,000 registered representatives.

Meanwhile, Personal Capital found that only 44%, or just under half, of those surveyed even knew what they were paying in fees on their financial products. As an illustration: For an investor who makes the maximum contribution to their company 401(k) every year from age 18 to age 65, and earns a typical 6% annual return, an extra 1% a year in fees will end up costing them a third of a million dollars.

“The consumer really needs to take control of their own financial lives,” says Shah.

Click here for the original article.

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