These are scary times for investors. Stories of stockbroker negligence, record Ponzi schemes, investment fraud, and client misrepresentation have become an everyday occurrence. It’s no wonder investors – seasoned pros and novices alike – are increasingly wary when it comes to seeking advice from an investment advisor or financial representative, questioning if anyone associated with Wall Street can be trusted nowadays. I’m reminded of a scene from the 1976 film Network in which fictitious newsman Howard Beale (played by the late actor Peter Finch) delivers his “mad as hell and I’m not going to take this anymore” speech.
Jo L. Wright no doubt felt the way of Finch’s character. Wright, a church secretary from Whitestown, Indiana, lost thousands of dollars in a bond fund formerly managed by Morgan Keegan & Company. Wright’s initial introduction to the Memphis-based brokerage was through her local Indiana Regions bank branch manager. At the time of the referral, Wright had her money in what she deemed “safe” and “secure” investments: a certificate of deposit and a savings account.
That all changed based on the recommendation of the bank manager and Morgan Keegan. Wright transferred her money into the Morgan Keegan Select Intermediate Bond Fund. Relying on the information provided by Morgan Keegan and her Regions Bank manager, she believed the fund was a safe, conservative investment and that any risk of principal loss was virtually non-existent.
In truth, Wright actually put her money into a high-risk and speculative financial product, one with significant ties to complex structured finance investments that included subprime mortgage securities. In no way was it the kind of investment that a conservative-minded investor like Wright should have been advised to purchase.
Wright didn’t know that, however, because her financial advisor allegedly didn’t tell her. Nor did Wright receive a prospectus about her investment before purchase.
Wright eventually filed a complaint against Morgan Keegan with the Financial Industry Regulatory Authority (FINRA), and in March 2009 was awarded $18,000 for the financial losses she suffered. Her case underscores several important issues, however, when it comes to investing your money and selecting a financial advisor.
First, it’s your money. That means investors need to do some due diligence of their own. This includes asking your financial advisor some tough questions. Chief among them: Where has your advisor worked in the past? Is there a pattern of multiple jobs in a short period of time? If the answer is yes, it could be a red flag.
Another key question concerns compensation. How is the financial advisor paid for his or her services? Is it based on an hourly rate, flat fee, or commission? In addition, find out if the advisor is given bonuses for selling certain investment products. If so, this clearly could be a conflict of interest if one of those products is pushed to become part of your investment portfolio.