Financial planning clients can quickly get the lowdown on the disciplinary or regulatory history of insurance brokers, financial planners or agents by checking their FINRA registration online or by calling the state insurance commissioner. However, to provide the fullest disclosure possible, planners might also consider revealing to their clients how they handle personal assets and investments. In other words, as a planner, do you practice what you preach? In this article we'll outline some measures that can help planners show their clients that they follow their own advice, which may be the surest way to promote professional integrity.
Your Credit History
The extent to which financial advisors must reveal information about themselves publicly depends in part on how they are registered. From a regulatory standpoint, registered investment advisors (RIAs) have it much easier than securities licensed personnel when it comes to disclosing personal finances. Members of the latter group must submit a current credit report to each new broker/dealer with which they attempt to register; any report that is questionable will generally prohibit the person from becoming registered. All broker/dealers check credit during the hiring process, and they are usually authorized in the hiring paperwork to pull a credit report at their discretion at any time. (For more information on keeping your credit history in good shape, read Check Your Credit Report.)
The securities license renewal application that registered representatives must complete every two years asks about bankruptcy or outstanding judgments from creditors. The audit form that reps must sign each year also asks if there has been any material change in the rep's financial status since the previous year's audit. Furthermore, if someone switches broker/dealers, credit history will once again be examined. Therefore, registered securities personnel must generally keep their credit in relatively good order if they wish to leave their current broker/dealer and find a new one for any reason. RIAs do not have to contend with this issue, as they register directly with the state and/or the Securities and Exchange Commission (SEC). (For related reading, see Policing The Securities Market: An Overview Of The SEC.)
Eat Your Own Dog food
A common test of the quality of a product is called "eat your own dog food". That is, if you won't touch your own product, then why should any future client do so? In most cases, planners should try to use at least some of the products that they recommend to their clients by incorporating some of their major client holdings into their own portfolios. Mortgage brokers should use one of the products that they advertise to their clients, while insurance agents should almost certainly carry the same kind of coverage that they sell, assuming that they are at risk for the type of loss insured by the policy.
This is not always possible due to the planner's personal circumstances, risk/reward scenarios and financial objectives, which may require a different product or strategy than those recommended to a client. For example, a newly-minted financial planner in his 30s obviously should not invest his retirement savings entirely in the certificates of deposit and laddered government securities that he recommends to his elderly clients. That said, the planner can maintain a sound, diversified portfolio that fits his own risk tolerance and time horizon, and which can include some of those very same products.
Planners who personally invest in funds or equities that they recommend to clients must carefully consider any possible conflict of interest. This is not always a material issue, such as when a planner recommends buying shares of a multinational corporation to a client because the purchase would probably be much too small to impact the stock price. But planners who own shares of small-cap or penny stocks must take great care to provide full disclosure to their clients when recommending these holdings to avoid directly profiting from any rise in the price of the stock as a result of a client's purchase. (To learn more about the illegal act of pumping up a stock for personal gain, see Investment Scams: Different Types Of Scams.)
Publicize Your Portfolio
Financial planners can show their clients how they manage their own money by making their personal investment portfolios public. Planners should ideally provide an up-to-date list of their own holdings, either on their company websites or in printed form. Planners should also clearly state their own personal risk tolerance and time horizon in order to provide a proper frame of reference. Those who display personal portfolios that closely match those of their clients can publicly demonstrate faith in their own investment picks. Furthermore, they can relate to clients on a more direct level when their portfolios values rise and fall together.
It goes without saying that planners should avoid taking excessive investment risk, control their spending and keep their estate plans updated. However, financial disaster can befall anyone, including financial professionals. Planners who face bankruptcy or foreclosure due to circumstances beyond their control can still maintain a professional image by taking steps to protect their own assets and get back on their feet as quickly as possible. In all circumstances, planners should try to follow the same steps that they would recommend to a client in a similar situation.
Planners should try to practice what they preach whenever possible. Those who take unnecessary risks or accumulate excessive debt risk tarnishing their professional reputations. Planners who manage their own portfolios in a manner similar to those of their clients will be able to relate to them more directly than those who do not - and therefore keep the trust of their clients longer.