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Most investors do not have the experience/knowledge to rate advisors. Clients of terrible brokers will rate their brokers highly based on the questions asked on the site. Remember, brokers are taught to manipulate and sell.

And, as you point out, advisors could easily be rating themselves.

How many investors ......

"...the BCT study found that the raw returns of equally weighted mutual funds (net of all expenses) for 1996 to 2002 were 6.626% for the investors working on their own and were 2.924% for funds provided by advisors.

In other words, the public working on its own did more than 100% better than financial advisors when it came to selecting equity mutual funds. After factoring in inflation and taxes, clients of financial advisors lost money and lost purchasing power."

http://advisor.morningstar.com/articles/doc.asp...

People need a way to find brokers/advisors that will earn their fees, but I don't think this site will be the solution. I wish I did.

To categorize clients who use a financial advisor, essentially saying that they're all too ignorant to rate their brokers, is a gross misstatement! There are millions of doctors, attorneys, business owners, and other professionals that use financial advisors; are they ignorant? There are also hundreds of thousands of financial advisors who work for all the major wire-houses, banks, and other firms that hold CFP’s, CFA’s, or Masters of Economics degrees; are they not qualified to advise?

The majority of investors cannot even explain the functionality of a mutual fund let alone the fee structure, and most don’t want to learn because of the complexity involved. Study after study has shown that investors fail to become educated due to the complexity of the investments, and the level of vocabulary Wall Street injects.

During our focus testing, financialjoe.com used various levels of vocabulary in the questions. We found the more in-depth the question, the less participation, and completion of the questionnaire.

financialjoe.com’s focus is participation. Through participation will come knowledge by way of experienced wisdom.

For example:

Through financialjoe.com investors rate their advisors. As each rates their advisor they’re tagged to that advisor, and are exposed to that advisor group discussion. It takes one of the users to bring up the discussion of 12b-1 fees, or anything else they have learned through experienced wisdom. Through these discussions they can together determine if the advisor disclosed the entire fee, or just portions of the entire fee.

Did the advisor disclose the entire fee for a wrap account (total fund expenses plus wrap fee) or did he essentially lie and just disclose the wrap fee leaving out the total fund expense because he wanted to capture the business.

The result? Mission accomplished! The advisor has now been exposed to every client that he services who participates as a user of financialjoe.com, as well as every potential client who was thinking about hiring him. This is a permanent record that cannot be expunged by the NASD or any other regulatory who settles financially without admitting guilt.

The final result is permanently weeding out these types of “advisors” who conduct unethical behavior. But, this cannot be accomplished without participation! So, in knowing this, why would we structure questions that we know will alienate the average investor?

The comment also states, “None knew what their bill for financial costs came to, or the effect of those costs over time. They had all been manipulated into trusting their 'advisor'...blindly”.

I can assure you through personal experience in explaining fees to clients that there are those clients who, after breaking down the fees to them, say, “I really don’t care about the different types of fees, just tell me the total fund expense”. I also know of RIA’s (Registered Investment Advisors) who tell their clients that their management fee is 1%, but fail to disclose to their client the additional mutual fund expenses held in a separate account.

As for the questions being “superficial” that is simply incorrect and needs no further explanation other than the aforementioned.

The financial industry encompasses more investment vehicles than just mutual funds. The commenter, “Yikes!!”, submits the BCT study, but fails to attach the entire package. Yes, the BTC study that Morningstar.com published has a lot of great info, but as Morningstar.com says themselves:

“I can't think of the findings for any study that apply to every single financial advisor in America”.

“The study is not perfect. It is unfortunate that the authors use the word "broker" in their landmark study to apply to almost all financial advisors. Their use of the word "broker" does not just encompass Series 7 licensed reps who are paid commissions and loads. It truly applies to almost all financial advisors who sell mutual funds. If you hold a Series 7 or Series 65 license, if you are a registered rep, RIA or IAR, if you work for a broker-dealer, major brokerage firm, wire house, or if you are an insurance agent with a Series 7 or Series 65 license, the BCT study may very well have analyzed your transactions (both buy and sell transactions) during the years of the study. Unless you work for a fund supermarket on a salary, your transactions were probably analyzed in the BCT study.

In the study, virtually everyone selling mutual funds (even RIAs and IARs) are referred to as "brokers"-even if you don't have a Series 7 license.”

“Why are these findings so scary? The BCT study implies that about 50% of all FAs produced returns of less than 2.924% per year.

When you factor in taxes and inflation, the clients of all of these "advisors" lost spending power and thus literally became poorer each year. This gives even more credence to the Wall Street Journal's Jonathan Clements' warning of many years that people would be better off if they avoided financial advisors.

I disagree-if only for the reason that skilled financial advisors provide many valuable services besides investment management-but that is the topic for another article.

The findings of the BCT study seem to apply most directly to advisors who have been selling mutual funds with a 5.75% load, a 3% or some other relatively high load or a front-end, back-end or level load. Even if the fund is a so-called "high-performance fund," with all these fees on top of the human tendency to buy high and sell low, advisors' returns may be much lower than most FAs ever suspected”.

“The BCT study found that it is the combination of high-cost mutual funds and advisor behavior that lead to such poor returns. Thus, it is conceivable that even if an advisor uses super-low cost index funds, he or she could significantly under-perform the indexes simply due to buying when prices are high (and everyone is exuberant about the market) and selling when prices are low (and many people are scared).

Conversely, it is possible that some advisors using high-cost funds could deliver outstanding performance by buying these funds when the prices are low (and when such funds are unpopular) and then selling them when prices are high (and everyone else wants to buy them). This is not what the BCT study found-but it is possible that a few advisors in America could be delivering such performance.

The above advisors might somehow be able to overcome the performance hindering effects of high-cost funds through their mastery of behavioral finance”.

For the ENTIRE article the following link will take you there.

www.morningstaradvisor.com/.../doc.asp

I will finalize my response with this. No system is perfect, but financialjoe.com will improve as technology advances, and as we find new ways to enhance the services we provide. As the author pointed out it's a combination of "High cost mutual funds and Advisor behavior", which lead to poor returns. Is that not what financicaljoe.com is changing?

I can assure you one thing will be accomplished. Investors will become wiser, poor advisors will be weeded out, and nothing will have a greater impact on Wall Street than the community of investors who came at them through financialjoe.com!

Cheers,

financialjoe.com

financialjoe says: "To categorize clients who use a financial advisor, essentially saying that they're all too ignorant to rate their brokers, is a gross misstatement! There are millions of doctors, attorneys, business owners, and other professionals that use financial advisors; are they ignorant?"


AND financialjoe says: "The majority of investors cannot even explain the functionality of a mutual fund let alone the fee structure, and most don't want to learn because of the complexity involved."


I don't understand - on one hand financialjoe says that the majority of investors can't explain mutual funds or fees, yet on the other hand, he says that I'm wrong to worry that they are too ignorant to rate their advisors. On what basis are clients rating their advisors if they are willfully ignorant of mutual funds and fees...and by extention other complex issues?


financialjoe berate me for saying that investors are ignorant, then he explains how investors are ignorant and wish to remain so.


And yes, many professionals ARE ignorant about the financial advice they receive.


financialjoe says: "There are also hundreds of thousands of financial advisors who work for all the major wire-houses, banks, and other firms that hold CFP's, CFA's, or Masters of Economics degrees; are they not qualified to advise?"


My educated guess is that about 10% of 'financial advisors' working with individuals are qualified to advise. How many 'financial advisors' that work with individuals have a Masters of Economics degree, or a Masters of Science in Financial Planning? Almost all CFA's are used at the institutional level from what I understand. Maybe some work with multi-millionares. CFP's have some basic knowledge but that does not mean that they are qualified. A CFP in not a degree - not even close. I think they take 5 courses and from what I understand, the insurance instruction is scanty at a time when insurance products have become amazingly complex.


financialjoe says: "During our focus testing, financialjoe.com used various levels of vocabulary in the questions. We found the more in-depth the question, the less participation, and completion of the questionnaire."


If someone doesn't want to bother to think, how valid is their rating? Rating a financial advisor is a huge responsibility!! Were advisors checked out after ratings were given to see what fees were charged, what funds were sold, what conflicts of interest exist, what returns were received...to ensure ratings were correctly given?


financialjoe says: "financialjoe.com's focus is participation. Through participation will come knowledge by way of experienced wisdom.

For example:

Through financialjoe.com investors rate their advisors. As each rates their advisor they're tagged to that advisor, and are exposed to that advisor group discussion. It takes one of the users to bring up the discussion of 12b-1 fees, or anything else they have learned through experienced wisdom. Through these discussions they can together determine if the advisor disclosed the entire fee, or just portions of the entire fee."


I do like this idea, but I have some concerns. One, the success depends on massive participation. Personally, I don't think there will be enough participation to make this effective. Two, if investors "cannot even explain the functionality of a mutual fund let alone the fee structure, and most don't want to learn because of the complexity involved", why would they participate on forums discusssing these complex issues? Also, what financialjoe could well end up with is a bunch of brokers pretending to be clients.


financialjoe says: "Did the advisor disclose the entire fee for a wrap account (total fund expenses plus wrap fee) or did he essentially lie and just disclose the wrap fee leaving out the total fund expense because he wanted to capture the business."


This would actually be an excellent question to ask people rating their advisor: "If you are paying a wrap fee, did your advisor also go over all the fund expenses you will also be paying in addition to the wrap fee?"


This would not be a difficult question and should be easy to answer.


financialjoe says: "The result? Mission accomplished! The advisor has now been exposed to every client that he services who participates as a user of financialjoe.com, as well as every potential client who was thinking about hiring him. This is a permanent record that cannot be expunged by the NASD or any other regulatory who settles financially without admitting guilt."


I don't see that as 'mission accomplished'. There are many issues...the ones I mentioned above, advisors rating themselves, having friends rate them, people with a vendetta rating them....and this assumes you get massive, educated, honest participation.


financialjoe says: "The final result is permanently weeding out these types of "advisors" who conduct unethical behavior. But, this cannot be accomplished without participation! So, in knowing this, why would we structure questions that we know will alienate the average investor?"


It's financialjoe's responsibility on his website to make sure ratings are as valid as possible. I would simply say that his fundamental principle should be 'do no harm' and from there he should act to make sure all ratings are valid. Participation is secondary. I have tried my best to give ideas for questions that will help investors give informed, accurate answers. Remember, 'financial advisors' are usually brokers that have been trained to gain confidence and sell products. financialjoe needs to find a way to get to the truth, knowing that clients have been manipulated and don't know much, if anything, about investing, as financialjoe has said himself. That's a tough job, but that's the responsibility financialjoe accepted by starting the website. I'd like to help, but I have been asked to end my participation.


financialjoe says: "The comment also states, "None knew what their bill for financial costs came to, or the effect of those costs over time. They had all been manipulated into trusting their 'advisor'...blindly".


I can assure you through personal experience in explaining fees to clients that there are those clients who, after breaking down the fees to them, say, "I really don't care about the different types of fees, just tell me the total fund expense".


financialjoe is twisting my meaning. It's easy to show the client a list of all costs totaled up. It's easy to show clients the chart NASD uses: www.retireearlyhomepage.com/advise.html


No advisors do this, though, except maybe fee-only planners that charge by the hour or a flat fee. Suggestion: Add to financialjoe's questions, "Have you been shown this chart?"


financialjoe says: "I also know of RIA's (Registered Investment Advisors) who tell their clients that their management fee is 1%, but fail to disclose to their client the additional mutual fund expenses held in a separate account."


Again, this would actually be an excellent question to ask people rating their advisor: "If you are paying a wrap fee, did your advisor also go over all the fund expenses you will also be paying in addition to the wrap fee?"


financialjoe says: "As for the questions being "superficial" that is simply incorrect and needs no further explanation other than the aforementioned."


I'll have to disagree on that one.


Also, how many brokers have been rated so far? Is there a way I can see ALL the ratings? financialjoe won't answer.


financialjoe says: "The financial industry encompasses more investment vehicles than just mutual funds. The commenter, "Caution!!", submits the BCT study, but fails to attach the entire package. Yes, the BTC study that Morningstar.com published has a lot of great info, but as Morningstar.com says themselves:"


Actually, Morningstar did not say this. The article was written by Donald Moine and, "The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar."


And, I provided a link to the article - the 'package'. So financialjoe was wrong about that. I think it is illegal to post the entire article, btw.


So far, this study has been discussed in Forbes, Money, WSJ, Motley Fool, Morningstar, Barrons, etc, etc....and to my knowledge, there has been no rebuttal published. This study paints a very poor picture for financial advisors selling mutual funds, and my understanding is that the vast majority of financial avisors do sell mutual funds.


Again, here is a link to the actual study:

papers.ssrn.com/.../papers.cfm


financialjoe says: "I will finalize my response with this. No system is perfect, but financialjoe.com will improve as technology advances, and as we find new ways to enhance the services we provide. As the author pointed out it's a combination of "High cost mutual funds and Advisor behavior", which lead to poor returns. Is that not what financicaljoe.com is changing? "


I have applauded some of financialjoe's articles and information. But some of it concerns me. Especially the ratings. Especially financialjoe's responses to me. As a financial advisor, financialjoe should be well aware of the manipulations, conflicts of interest, costs and poor performance in the financial advice industry and should target those shortcomings for exposure in the answers to his questions. Why not do this when there are easy questions that will accomplish this task?


financialjoe says: "I can assure you one thing will be accomplished. Investors will become wiser, poor advisors will be weeded out, and nothing will have a greater impact on Wall Street than the community of investors who came at them through financialjoe.com!"


I wish I could believe this, but financialjoe's attitude towards me and much of what I have seen on the site makes me wonder if this is a case of the fox telling the chickens how to guard the henhouse.


financialjoe encouraged comments, but when I gave thoughtful, honest, valid comments, financialjoe asked me to leave the site under the false pretense that all I care about is DIY investing. That is certainly not the case. I care very much that people using financial advisors get value for value. Sadly, I don't think that most of them do. Sadly, I don't think financialjoe will solve this.