What if Something Goes Wrong with Your Advisor Relationship

Plus, more on how Invesco offers you a way to own the Top 100 stocks of the S&P 500

Ric Edelman: It's Thursday, November 7^th.

Here's a question I got from Bob. He's in California.

Bob: “Hi, Ric, writing about the discussion on the Invesco S&P 500 Quality ETF. The ticker is SPHQ. I like the idea of owning the top 100 of the S&P 500. Can't find anything similar with Vanguard, so why not convert all of my investment in the Vanguard Total Stock Market Index Fund Admiral Shares VTSAX to SPHQ. This would be in my IRA, so there would be no tax consequences.”

Ric Edelman: So Bob, based on your bias, and I don't mean bias in a negative way, your preference, that's an alternative synonym for bias. Regarding, your preference for owning what you said are the top 100 of the 500 stocks in the S&P, yeah, owning the Vanguard Total Market Index, which owns every publicly traded stock, that doesn't make any sense. Right? Cause there are thousands of those.

You really say you want to own only the top 100. So, I would agree with you to swap out your Vanguard Total Market Index Fund for an alternative. But I want to make sure you're understanding that the Invesco S&P 500 Quality ETF is not the top meaning biggest, but rather top meaning best, in their view. Okay. So this is important. It's quantitative versus qualitative.

So, when people would generally refer to the phrase, the top 100 or the top 500, they're typically referring to the biggest, the largest companies based on market cap, what is the value of the company.  And the S&P 500 is an index of the 500 largest companies.

Vanguard's fund is simply an index of every stock indiscriminately, quite frankly. The S&P 500, the 500 largest stocks. The Invesco S&P 500 quality ETF looks at those 500 stocks and based on a variety of metrics, which I talked about in my show back on September 6^th, (here’s the link if you missed it), uses a series of criteria to determine which stocks are the most worthy to invest in. That's not necessarily the biggest of them, but in Invesco's views, the best ones to invest in. So, it is not academically, the quantifiably top 100 in terms of size. It is in their view via qualification who they think are the best ones.  Now I'd mentioned that only as an if, full disclosure so that you understand what you're doing. So sure, go ahead, and do this if that is your predilection.

But, you phrased it in a very interesting way. You said, why not convert all my investments to it? Really? You want to convert all of your investments? So you've got to recognize this is a massive switch in strategy. You're going from owning the market to a very, very small piece of the market, as evaluated by Invesco in this one fund.

So just keep that in mind. I'm not saying don't do it. I'm just saying, have your eyes wide open. The fact that this is inside your IRA so there are no tax implications, makes it really simple and easy to do because you don't have to worry about that albatross.

So, go ahead, if you wish, but you know what? You know what…you know what? Rather than just asking me this one little question, maybe you should go ask a financial advisor because there's one huge gaping piece of data that you didn't provide.

You didn't tell me how much money you have invested in the Vanguard Total Market Index Fund. And you didn't tell me how much money is in that fund relative to other investments. In other words, what percentage of your total portfolio is in this fund? Is this Vanguard Total Market Index, is that the only investment you own that represents 100% of your money? Or is it only 1% of your money? And if it's only 1% of your money, I really don't care what you do. I'm more concerned about the other 99% that you didn't even ask about.

So, we want to make sure that you're making a correct decision on the overall total portfolio on a comprehensive basis, as opposed to doing it in a manner that is ignoring the bigger picture. Right? So that is something I think you should look at.

And although there may be no tax consequences associated with this particular investment, I'll bet you have some investments that are in taxable accounts where you do have to think about those kinds of things. And then you've got related issues of rebalancing. And what about new investments you make over time? If you're adding money to your account on a monthly basis, through something called dollar-cost averaging, how are you handling all of that? And how did you register the account? Do you have any joint accounts with a spouse? Do you have trust accounts? Do you have special accounts for children? Special needs trust, for example, or rabbi trust or, a springing trust or what's going on in your life, with family, parents and as elders, children, as, minor beneficiaries. There's a whole lot to talk about here, isn't there?

And I'm not convinced just based on the narrowness of your question that you're necessarily taking a look at this in a totality perspective, as opposed to looking at a bunch of individual silos. This is what an advisor can do for you. Turning to an advisor who does comprehensive financial planning and investment management can be a really terrific value to you. And that's what I would suggest that you do.

I want to mention this. This segues into what I wanted to talk about today anyway, not specifically directly to Bob, but to you as well, think about this.

Do you have a financial advisor? And if you do, does your advisor do comprehensive financial planning? You know, more than half of investors say that it's important to have a written financial plan that offers the results of a comprehensive financial planning strategy created by an advisor. More than half of investors say that's important, but less than half of advisors do it.

There's a new study that just came out that discovered that less than half of advisors examine their client's goals, needs, and risk tolerance. Less than half of advisors look at their client's entire financial picture. What are these advisors doing instead? They're managing investments. In other words, if you call your advisor and you say, I want to hire you and I'm going to send you $100,000 to invest. The advisor goes and invests it without taking a look at taxes, without taking a look at cashflow, without looking at your debt or your income, without looking at your goals, without looking at risk tolerance, without looking at what your spouse may have to say about all of this, without looking at your attitude about estate planning, inheritance, and long-term care needs, elder care, dealing with children.

And some advisors, the majority of them, you give them money to invest, they're going to invest it for you. And that's it. They don't look at tax planning, they don't look at cashflow management or estate planning or executive compensation planning, things like stock options, restricted stock, non-qualified deferred comp. They don't look at lending and credit. They don't look at risk management or insurance or education planning or income planning and retirement, such as when to claim Social Security or your pension. They don't look at elder care planning or charitable giving.

In fact, more than half of advisors, according to this research, are case-based planners, meaning they focus on investment management and they only do some of this other stuff as needed or when the client asks about it. And yet, according to this research, 60% of advisors claim to be comprehensive financial planners, but in fact only 26% of them really are. So are you getting the services from your advisor you want to be getting? Are you getting the services from your advisor that you have paid for?

What it really comes down to is that you need to choose an advisor. So, the first thing is to make sure that you're getting what you're paying for. If you don't feel that you need all those comprehensive services, that's fine. That's one thing. But if you think you do need them, and you're not getting them, but you're paying for them, well, you know, you ought to hire someone who will deliver them, and you ought to make sure you're getting what you're paying for.

This has to do with client satisfaction, right? Because when you hire an advisor, You're optimistic, right? I've never seen anyone hire any advisor with the expectation that they'd end up losing money or that they would have lousy service or an unhappy experience. So, you're assuming that life will be good. You'll be happy.

But what if that's not how it turns out? What if something goes wrong? What if, there's a mistake made, where the advisor buys the wrong stock. You know, they do what's called a fat-fingered trade, where they, in typing the symbol of the security, they mistype it, or instead of buying a hundred shares, they, with a fat-finger trade, as they call it, they hit 400 instead, and they buy too many for you, or they sell too much or too little, or they just make some kind of mistake that increases your fees or your taxes or lowers your returns. If you go to your advisor and file a complaint with them, what are they going to do about it?

Let's assume that there's no disagreement on the facts. Let's assume everybody's in agreement that the advisor made a mistake. Are they going to honor that mistake? Are they going to own it? Are they going to reimburse you for your loss? Or not. And even if the advisor wants to do the right thing, does the advisor have the financial wherewithal to do the right thing?

Because, you know, if it's a big account, the mistake could be pretty big. And if the advisor is a small independent advisor working on their own, do they have the financial resources to make it good? This is a big reason why I believe you should hire an advisor with a very big firm. For two reasons, not only because, the big firm has the money to reimburse you if something goes wrong, but the big firm also has a big reputation.

You know, they don't want to have their reputation sullied by somebody who makes a big stink over their experience. So, they have more than just you to be thinking about in getting things fixed. And because they're such a big firm, they have the financial wherewithal to do it as well. So, I'm a big fan of recommending an advisor who's with a big firm.

I'm not saying never hire a small, independent advisor. I'm just saying, you’ve got to ask that advisor, if something goes wrong, what about me? You know, how are you going to help me? If you choose you want to help me. Which is why you want to know that the firm, that the advisor has something called E&O insurance. Errors and omissions. E&O insurance policies are mandatory in my view, they are essential. I've always carried E&O insurance in our practice because we never knew, you know when you've got a lot of staff doing a lot of paperwork on behalf of a lot of clients, sometimes mistakes happen. You might make an error of omission. That's why it's called Errors and Omissions. You know, you failed to do something or an error of commission, meaning you did something that you weren't supposed to do. Either you executed it late or wrong.

And so, this is why I'd much rather own an insurance policy that if I do make a mistake like this, I can turn to the insurance company. It’s the same reason you buy auto insurance, right? And fire insurance and health insurance. If something goes wrong, I don't want to have to write that check myself, but I do want to make sure that I can recover from the mistake. So, you want to know that your advisor has an Errors and Omissions insurance policy.

In fact, PIABA is now strongly encouraging the government to make this mandatory. PIABA is the Public Investors Advocate Bar Association. The financial services industry hates PIABA. PIABA, essentially, are the lawyers who sue financial advisors and brokerage firms. You know, they're the ambulance chasers of the financial services industry, if you were to ask the broker-dealers of the world.

When a client loses money, they hire a lawyer to represent them who has experience in this field. And that lawyer will be a member of PIABA. PIABA has now looked at data from FINRA and just picture this, you have the unfortunate experience of having something go wrong with your advisor and you end up losing money.

The advisor makes a mistake, or in some cases, the advisor is an outright crook and they steal your money. Although that's really, frankly, quite rare, more likely they just make a mistake, they screw up somehow or other. And the advisor doesn't make it right. So, you end up filing an arbitration claim or you go to court and you pursue your case with the help of a lawyer.

You win the case, good for you. And the court rules or the arbitration panel rules that you deserve to get restitution and they award you a bunch of money. PIABA has discovered, looking at FINRA data, that in all of the cases where the investor won and an award was ruled in favor of the investor, in 30% of those cases, the advisor never paid the award.

We're talking $5 million in 2020 that was never paid, $19 million in 2022, $23 million last year. So even after you've suffered the loss, gone to the trouble of hiring a lawyer, going through the litigation process, winning your case, and the advisor stiffs you anyway. Now, in many cases, I would argue most, the advisor stiffed you because the advisor didn't have the money to pay you. In many cases, the client is wealthier than the advisor. And if you're a multi-million dollar client, and you're investing a lot of money with that advisor, and there's a mistake that occurs that costs hundreds of thousands of dollars, maybe even millions, the advisor doesn't have the money to pay you, even if they want to pay you. They can't.

Another argument going back to why I say, work with a big firm. And this is why, like I just said, you work with a big firm and ask your advisor, do you have E&O insurance coverage, Errors and Omissions insurance coverage?

You might even go so far as to ask them for a copy of the policy or evidence of the amount of coverage that is provided. And you might even want to ask the advisor, how often have you been sued? How often have you been taken to arbitration by a client? Because if you've got an advisor where this has happened a lot, that kind of tells you something, right? So, food for thought.

And more food for thought. Next Wednesday, November 13th, if you are looking for generating income in a world of declining rates, I've got the webinar for you. It's coming up next Thursday, 1:00pm EST. It's free. And I'm going to be joined by Rene Reyna and John Burrello from Invesco talking about a couple of ETFs that are really designed for investors seeking growth, consistent monthly income and lower volatility.

It's going to be a really interesting conversation because we haven't been faced with this in a couple of decades, right? How do you generate income while rates are going down? Because we've been, generally, over the past several decades in an environment where rates kept going up. Not so much anymore. And so, that's what this conversation is going to be all about. It's free. You get one CE credit if you're an advisor. I encourage you to sign up for it right now. A link to do so is in the show notes.

9/6/24 Podcast - These Two ETFs Give You Unique Exposure to the S&P 500 and Nasdaq 100   https://www.thetayf.com/blogs/this-weeks-stories/these-two-etfs-give-you-unique-exposure-to-the-s-p-500-and-nasdaq-100?

f you like what you're hearing, be sure to follow and subscribe to the show, wherever you get your podcasts, Apple, Spotify, YouTube, and remember leave a review on Apple podcasts. I read them all. Never miss an episode of The Truth About Your Future. Follow and subscribe on your favorite podcast app.  

I'll see you tomorrow.

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Links from today’s show:  

Invesco S&P 500® Quality ETF (SPHQ):  https://www.invesco.com/us/financial-products/etfs/product-detail?audienceType=Investor&productId=ETF-SPHQ

Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) https://investor.vanguard.com/investment-products/mutual-funds/profile/vtsax#overview

9/6/24 Podcast - These Two ETFs Give You Unique Exposure to the S&P 500 and Nasdaq 100   https://www.thetayf.com/blogs/this-weeks-stories/these-two-etfs-give-you-unique-exposure-to-the-s-p-500-and-nasdaq-100?

11/13 Webinar - An Innovative Way to Generate Income in a World of Declining Rates: https://www.thetayf.com/pages/november-13-2024-an-innovative-way-to-generate-income

10/9 Webinar Replay- Crypto for RIAs: Yield, Staking, Lending and Custody. What’s beyond the ETFs? https://dacfp.com/events/crypto-for-rias-yield-staking-lending-and-custody-whats-beyond-the-etfs/

Certified in Blockchain and Digital Assets including Crypto Taxation Course/Webinar: https://dacfp.com/certification/

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