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Things Your Investment Advisor Should Never Do

There are some things your financial advisor might do that you don't like, such as take off every Friday afternoon to head for the beach or recommend that you put money in an investment that ends up in the tank. But there are some things your financial advisor should never, ever do. If he does, you need to find yourself a new advisor, and you might want to consider taking legal action.


If your advisor tells you the mutual fund you're buying carries no commission for him, but you find out later that he made big bucks by selling it to you, that's misrepresentation. It's also misrepresentation if the advisor tells you to go ahead and put your money in a particular investment because you're guaranteed to make 20 percent, and you end up losing most of your principal.

Money Pit

Be on the lookout for an advisor who guarantees your investments or makes commissions off of sales that he told you carried no commissions for him. If he's doing just that, you can charge him with misrepresentation. Some shady advisors also move your investments all over the place, earning commissions at your expense. That's called churning and burning, and you don't have to stand for it.

Another kind of misrepresentation is personal misrepresentation. If you find out your advisor has told you he's something or someone he's not, you should ask him about it, check out his most recent ADV, and if you still feel uncomfortable, find someone new.

If he would have said, “I think this might be a good investment for you. Why don't we try it?” you couldn't charge that you'd been a victim of misrepresentation. But an advisor should never tell you something is guaranteed unless he has a guarantee, in writing. Your advisor should always give you the pros and cons of an investment and tell you exactly how the risk relates to your objectives. If he doesn't, consider it a sign that he may be conducting less-than-ethical business.

Taking Custody of Your Money

Regardless of what type of advisor you have, he or she should never have custody—or personal access—to your money. Having custody means that the advisor would be able to move your money into his or her business account, after which who knows what might happen to it. You don't want your money in your advisor's account, even if only for a few days. Always make investment checks payable to the brokerage house, insurance company, or whatever, but never to your advisor.

Ignoring Your Wishes or Neglecting to Keep You Informed

If you read about a money-market fund that gives you just what you've been looking for and you call your advisor and tell him you want to put $3,000 in it, he should go ahead and complete the transaction. Unless he's a money manager (and he should do it anyway), your advisor is obligated to follow your instructions. Now, if he feels it is an inappropriate investment for you, he should tell you why, maybe even following up with a letter; however, he should still follow your instructions.

He may try to advise you not to put your money in that particular fund, and if you trust him, you'd do well to listen. Still, if you insist, he must place your money where you tell him. It is, after all, your money.

If you find out your advisor has been buying and selling your investments without your approval, you have a legitimate complaint. Terminate your relationship immediately. A money manager or broker has two types of investment relationships: discretionary and nondiscretionary. If your relationship is nondiscretionary, an investment should never be made without your agreement. If your advisor has discretion, you should have a formal agreement, and you should fully understand the discretionary relationship and what it costs.

Show Me the Money

Arbitration is the hearing and determination of a dispute between parties by a third party. The American Arbitration Association will send you materials you'll need to prepare your own case, if that's the route you choose. Call the American Arbitration Headquarters at 1-212-716-5800 to request the package, or write to the headquarters at 335 Madison Ave., New York, NY 10017-4605.

If your financial advisor always has an excuse to get out of a meeting with you, or doesn't keep you informed about what's going on, you need to ask why. Your advisor should meet with you either on a regular basis or certainly upon your request.

If you feel that your financial advisor has cheated you or has done something unethical, you can look for help by contacting a securities lawyer. Or you can seek arbitration, which is the hearing and determination of a dispute between parties by a third party. You can do this either by hiring an attorney to represent you in arbitration, or by representing yourself in arbitration. Before you hire an attorney, contact the NASD (the National Association of Securities Dealers) at 1-301-590-6500 or online at www.nasd.com. This website lets you file a complaint online with the NASD.

If you go into arbitration, you and your advisor will each present your side of the matter to an arbitration panel. A three-member panel will hear the case and then decide on a solution. Its solution is final and can't be appealed.

More on: Family Finances

Excerpted from The Complete Idiot's Guide to Personal Finance in your 20s and 30s © 2005 by Susan Shelly and Sarah Young Fisher. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.

To order this book visit the Idiot's Guide web site or call 1-800-253-6476.


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