Barry P. Barbash of the Securities & Exchange Commission and Jeffrey M. Laderman of Business Week were the Dec. 3 guests to discuss selecting an investment adviser for your finances.
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Good evening and welcome to Business Week Online. How do you find the right investment adviser? Carefully! Lots of people need help with the complexities of planning for retirement or the kids' education, for how to allocate money in your 401(k), and much more. But it's a crowded field, and how can you be sure you won't be victimized?
To help you with this question, our guests are Barry P. Barbash, director of the Investment Management Div. of the Securities & Exchange Commission, and Jeffrey M. Laderman, Business Week senior writer and author of "Can 21,500 Investment Advisers Be Wrong?" in the current issue of BW (Dec. 11).
Barry Barbash oversees the SEC's watchdog duties with mutual funds and investment advisers. Before taking that post, he was a partner in the New York law firm of Willkie, Farr & Gallagher, with a specialty in institutional investor law. He's a graduate of Bowdoin with a JD from Cornell. His screen name tonight is BarbashB.
Jeff Laderman (JeffBW), keeps tabs on the markets and mutual funds for BW. The author of Business Week's Guide to Mutual Funds, he presides over the magazine's annual Mutual Fund Scoreboard. He joined Business Week in 1982 after working for The Detroit News and The Home News of New Brunswick, N.J. He is a graduate of Rutgers with a master's from the Columbia Graduate School of Journalism.
The moderator is Jack Dierdorff (JackBW), consulting editor of Business Week Online and former managing editor of the magazine. And now on to our discussion of investment advisers -- and the questions you send us here on stage via the Interact button.
JackBW: Good evening to all of you on AOL. Welcome to BW Online, Barry Barbash. Hi, Jeff Laderman.
BarbashB: Hi, Jack. Hi, Jeff. Thanks for having me in tonight.
JeffBW: Hi, Jack. Hi, Barry.
JackBW: Jeff, you can ask Barry Barbash of the SEC his first question of the evening.
JeffBW: If someone tells me he's an SEC-registered investment adviser, am I supposed to be impressed by that and give him my money? What does it actually mean to be an RIA?
BarbashB: The short answer is you shouldn't be impressed. Registration means that he's subject to regulation and oversight by the SEC. It doesn't mean he is a good or bad financial planner. In other words, the SEC makes no judgment about the qualification of investment advisers.
JackBW: BobArn3130 in Teaneck, N.J., sends us this question.
Question: Can either of you hazard a guess as to what percentage of investment advisers are dispensing bad/questionable advice? (How many such advisers are there, anyway?)
BarbashB: In answer to the second part, there about 22,000 registered investment advisers. It's virtually impossible to hazard an answer to the first part of the question. I'd like to say they're all good, but that's not realistic at all. Our sense would be that a great majority of advisers are honest. But unfortunately, even a small number of dishonest ones is problematic for investors.
JeffBW: I think most are pretty well educated and qualified. Many become RIAs after they've spent a long time in the brokerage business. Some are financial planners, and some CPAs. The problem is that since it's fairly easy to become registered, some people might sneak in there who really shouldn't be there. That's why investors have to be on guard when they hire an adviser.
JackBW: Try this next.
Question: What should I look out for in choosing the right adviser? Any things to check on?
BarbashB: My first rule of thumb is to view hiring an adviser similar to choosing a doctor or a lawyer. Be clear as to how much you're going to pay, and what services you'll be paying for. You can ask the SEC for background info about your adviser, including whether he has ever had any problems with the law before. For some advisers, the National Assn. of Securities Dealers can provide similar information. Some advisers are also regulated as broker/dealers. State regulators can also be asked about background info on advisers.
JackBW: Deb465 has a similar question. Anything to add for her benefit? Is a big company safer?
Question: My father will be retiring soon and is looking at an investment adviser with a major company. Any advice you can give or things to be aware of?
JeffBW: A big company may be more reassuring than a solo practitioner, but I would still ask the same questions. What are you going to do for me? How much is it going to cost? What are your qualifications? Also, are you giving me a customized portfolio, or are you managing the money just like you do for hundreds of other people?
BarbashB: One other point is to ask whether the adviser gives advice only about the big companies' investment products or all companies' products. That is, you should ask whether the financial adviser is compensated differently for recommending his own companies' products.
JackBW: D Cuneo no doubt speaks for many with this question.
Question: As a small investor, are my interests really considered by an adviser, or am I better off tackling the responsibility myself and becoming self-educated and self-sufficient?
BarbashB: I would say that the answer depends on how comfortable you feel making your own investment decisions. For example, I am capable of changing my own oil in the car, but I'd rather go to an expert. The same principle should hold true when deciding whether to make my own investment decisions or seeking advice from a professional.
JackBW: This one's also for you, Barry, from MonaTZ.
Question: To what extent is the SEC policing advisers, and what are the sanctions for misconduct?
BarbashB: One concern the SEC has is that the number of advisers has grown far more than our resources over the past 5 to 10 years. As a result, we don't have the opportunity to inspect as many advisers regularly as we would like. We are now working with Congress for a remedy for this problem. We can throw people out of the investment advisory business, we can fine them, and we can impose other types of conditions to their continuing in the business if they run afoul of the law.
Question: Does anyone or any agency rate investment advisers based on what they've done for clients?
JeffBW: None that I know of.
BarbashB: No governmental agency does that. There are some private companies that do rate investment advisers. I don't want to cite any for fear of appearing to give any government backing to one or another.
JeffBW: Are you talking about a Morningstar-type company for advisers, Barry?
BarbashB: To my knowledge, there is no one as large as Morningstar. There are companies that do seek to rate investment advisers, mostly on the basis of investment performance, as opposed to some other criteria.
JackBW: Here's a question about state-level watchdogs.
Question: How prepared are the states to regulate investment advisers? Are some states better at this than others?
BarbashB: The answer is some states are better prepared than others. It is generally the case that states are better today than, say, 5 or 10 years ago.
JeffBW: Barry, are there fewer problems with fee-only advisers than with advisers paid through commissions?
BarbashB: Very interesting question. Fee-only planners or advisers may well be subject to fewer conflicts of interest. I am concerned, however, that people not conclude that simply because an adviser is a fee-only adviser that that adviser is better than one who is paid through commissions. We have started to see some advisers misrepresent themselves as fee-only.
JackBW: BobArn3130 is back with a personal story.
Question: A few years ago, my mother's bank urged her to invest with an adviser who provided little detail on himself or his record. She nearly bit because the bank advised it -- before deciding not to. Doesn't this sound sleazy? How often does it happen?
BarbashB: The answer is that there are many programs typically called "wrap" programs. Under such a program, a bank or brokerage tries to match an investor with an adviser suitable for that investor. These kinds of programs have become very prevalent today -- I understand that over $117 billion is invested through these programs. It's a growing business and if operated correctly, can provide investors appropriate investment advice. No type of program is ever completely free from bad apples who seek to mislead or take advantage of investors.
JackBW: Now Jeff has a question.
JeffBW: Barry, what happens when your auditors show up at an investment adviser's office for an audit? What exactly are you looking for?
BarbashB: We review the adviser's books and records and operations. We generally seek to find out whether the adviser is operating in accordance with the federal securities laws. We focus particularly on potential conflicts of interest. We look, for example, at how the adviser allocates investment among its clients. We want to make sure, in other words, that the adviser is not favoring some of its clients over others. In our audit, we also seek to ensure that the adviser is not stealing from clients, a rare occurrence but one that happens occasionally.
JackBW: MSefton has a question of interest to everyone with a 401(k) account at work.
Question: If an employer chooses an investor or investment company to manage the 401(k), what protection is there for employees who (sometimes) blindly contribute year after year? We have heard about retirement plans going bankrupt, and this is frightening.
BarbashB: Employee benefit plans, including 401(k)s, are subject to oversight by the U.S. Dept. of Labor under the federal pension laws. Recently, the Dept. of Labor has found a number of instances in which employers have taken or not paid out moneys that should have been invested on behalf of 401(k) participants. An employers' stealing money in that way may also violate federal securities laws. So the SEC has an interest in this kind of illegal activity as well. One general note -- a 401(k) plan, as I understand it, could technically not go bankrupt.
JackBW: Now, from Jeff Laderman.
JeffBW: Barry, let's talk about mutual funds, since you also regulate that area. There's been an explosion in the number of funds, just as there has been in investment advisers. Is the SEC any better equipped to monitor the funds than the advisers?
BarbashB: The answer is yes. Under Chairman [Arthur] Levitt's direction, the SEC has allocated more resources, particularly over the last two years, to inspecting mutual funds. As a result, we have been able to inspect mutual funds on a regular four-to-five-year cycle, which we believe provides investors with adequate protection. Investors need to be concerned, though, as much as about selecting a mutual fund as they do about selecting an adviser. The SEC makes no statement about whether any fund is a good or bad investment.
JackBW: Here's the next question.
Question: A lot of investment advisers evidently sell the stocks/insurance policies/mutual funds, etc. they advise clients to choose as investments. Do you see anything wrong with that, or not?
BarbashB: That presents opportunities for conflicts of interest. It's not necessarily illegal, but investors should ask whether their advisers engage in those kinds of practices. Investors need to know whether the recommendations of their advisers are clouded by conflicts of interest. Under the federal securities laws, advisers are obligated to tell their clients about conflicts of interest faced by the advisers. But it's always a good idea for the investor to protect him or herself and ask.
JackBW: As we near the end of our conference, this seems an appropriate question.
Question: What recourse do people have if they feel misled or cheated by an investment adviser? Conversely, what responsibility do clients have to look out for themselves?
BarbashB: If an investor feels cheated, he or she can contact the SEC either through the Investment Management Div., my division, or through our Office of Investor Education, which used to be known as our Office of Consumer Affairs. Investors can also contact their local state regulator if they feel cheated. At the SEC, we try to answer any such inquiries that we receive. The best protection, though, for any investor is to watch out for himself or herself and be diligent.
JackBW: Here's another question about sources of help in the selection process. This is from Evan1995.
Question: AARP and Charles Schwab each have excellent free documents on selecting an adviser. What do you think of these?
JackBW: And any other sources?
BarbashB: The Schwab material I haven't read that closely. The AARP we have reviewed and find them an excellent source of information. I would add that a number of financial planning groups around the country, as well as certain accountants' groups, have also prepared solid background material for choosing investment planners.
JackBW: That has to be a wrap for tonight. Thanks so much for being with us, Barry Barbash. And thanks, Jeff.
BarbashB: Thanks for having me, and I'd love to do it again!
JeffBW: Goodnight, Jack, and thanks for being our guest, Barry.
OnlineHost: Thanks to Barry Barbash of the SEC, Jeff Laderman of Business Week, and all the BW Online team for this conference on picking an investment adviser. And thanks to all of you on AOL, with apologies to anyone whose questions we didn't have time for.
If you'd like to continue the discussion, we invite you to move to the BW Online Chat Room. Or you can post comments and questions on the BW Online Message Boards. Transcripts of this and all other BW Online conferences are available soon after the event (under Talk, Special Events, or Search BW).
Take note of another BW Online event Tuesday, Dec. 5 -- an interview with author Rosabeth Moss Kanter of "World Class: Thriving Locally in the Global Economy" (10pm ET, Main Stage). And remember to join us in the Globe every Sunday at 9 pm ET for our weekly conference, usually featuring the Cover Story in the current issue of Business Week. Thanks again and goodnight!
Copyright 1995 by The McGraw-Hill Companies, Inc. All rights reserved.
