Understanding the Duties of Financial Advisors

Financial Advisors have been the “scapegoats” of this economic turmoil with calls from frustrated clients and record level of lawsuits more and more advisors find reviewing their insurance policies. The complaints and lawsuits range from unauthorized activity to unsuitable recommendations some are legit others are a reaction to losses in financial markets and not understanding the role of a financial advisor. So here is a short guide of what an Advisor can and cannot do as well as some tips. I recommend you read How to Find A Good Financial Advisor; Ask These Questions.

Duties of Financial Advisor

Know Your Client (KYC)

This is the the most important aspect of an advisor duty, they have to know their clients. And this does not just mean their identity and place of employment, they need to understand the needs of their clients, the financial and personal situation of the clients, risk tolerance of their clients and anything else that can help in financial decisions. Usually this is done through a Investor Profile questionnaire where you answer about 10 questions about your income, investment knowledge, risk tolerance and you get a score based on this information which determines your risk level. However this is NOT enough, investors always tend to believe they can handle more risk than they really can, often investors don’t really understand risk. The advisor needs to educate the client on risk and take the whole situation into account when making recommendations.

Stay in Contact with Clients

responsibility

Clients situations changes, they may have a child or bought a house, lost a job or became ill. Things change and with it the risk level of clients changes, if a client just had a child the situation needs to be reassessed, the client now has more obligations and expenses the risk level may have to be reduced. Therefore the advisor has a fiduciary duty to stay in touch with their clients to ensure that investments are still suitable. I always recommend that if your advisor has not at least contacted you by phone in the last 3 or 4 months than either talk to them or maybe start looking for a new advisor.

What Can A Financial Advisor Do

Investment Recommendations

Financial Advisor’s can make investment recommendations, depending on their licensing. If they are just Mutual Fund licensed they can only make recommendations on mutual funds, however most Financial Advisors are licensed through IIROC as full Investment Representatives which means they can advice on all type of securities (Mutual Funds, stocks, bonds etc but NOT options and futures). They may also be licensed to sell insurance if so than they can provide insurance advice however they need to state any conflict of interest they may have.

Perform Transactions

Advisors can make transactions on your accounts, with your consent, this can be buying or selling securities. Depending on the agreement you have signed, a written authorization is not always required to make the transactions a simple phone instruction can be sufficient.

Refuse Orders

Advisors can refuse to execute certain buy orders. Often investor’s hear of a ‘hot stock’and call the advisor to make the transaction almost 90% of the time these purchases are speculation and out of the client’s risk profile in these situations the advisor has a duty to advice against the transaction however investor’s won’t always agree with this and may wish to go ahead putting their investments and advisor at risk. In these situations the advisor has the right to refuse the order. Refusing order will usually result in frustrated clients and lost revenue with a potential of losing a client so not many advisor’s will refuse orders, I have refused orders in the past when they have been unsuitable for clients and never lost the client because of it.

What Advisor’s Can Not Do

Unsuitable Recommendations

Financial Advisor’s can not make unsuitable recommendations to clients, all recommendations must to fall within the investor’s risk profile. Investor’s must be presented with all the risk associated with the security and make an informed decision.

Unauthorized transactions

As mentioned earlier advisors can make transactions on your account with your permission, unauthorized transactions is the number one reason for lawsuits. An advisor can NOT buy or sell securities without your consent, it is important you check your statements consistently and contact your advisor if their are any questions. Sometimes it is a misunderstanding which can be easily rectified.

MisleadingInformation

A financial Advisor has to provide you with accurate information before making an investment decision, this includes presenting possible risks of the investment. Sometimes Advisor’s do not take the time the explain the risks of a certain investment accuratly and with mutual funds they usually JUST hand you a Prospectus (which they are legally required to do) and believe their job is done. A good advisor will take the time to educate the client of the potential risks of the investment even if it may cause the investor to reject the offer. Advisors CAN NOT provide misleading information regarding an investment in order to get the sell, although this may seem logical it happens too often and. Only invest when you understand the investment.

This is a short list of the duties and obligations of a Financial Advisor, Advisors have many other duties as well that may not be very apparent (confidentiality, continuing eduction etc.). Although this list focuses on the advisor, their job depends very much on the cooperation and honesty of the client. Clients need to answer questions honestly and to their best ability as well as keeping up their advisor of personal situation. If you are laid off or other major changes contact your advisor and discuss your new situation a good advisor will make time to understand your situation and adjust your plans.

Having investment losses is just part of the game, sometimes it is the advisors fault other times it is not, know what an advisor can and can not and communicate with him/her consistently to ensure a happy and satisfactory relationship.

Related Post:

Investment Advisor’s Conflict of Interest, an Insider view

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Comments

  1. sushil says

    write a piece on
    advisor’s duty to educate clients on matters
    that all capital gains/losses are not reported on slips T3 T5slips (?)
    Failing to educate clients on this matter can amount to negligence.
    Also ask clients if the prepare / file their own taxes.
    In that case extra education, vigilence, guidance is required.
    Advisors should go over tax reporting package that investment cos send to clients.tax-efficiency is as important as returns on investments.

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