Should he have said something?
February 17, 2012 7:35 AM   Subscribe

Is there a code of ethics for financial advisors?

I switched financial advisors last summer. He sold everything in my account and bought the investments that he recommended. I now find that I have a sizeable capital gain to report and a tax to pay. It's only 15%, of course, but still I would have wanted to know about it. He mentioned nothing about the tax implications of what he was doing.

Do financial advisors have a code of ethics? Are the tax implications of their recommended course of action expected to be discussed with the client before it is implemented?
posted by anonymous to Work & Money (10 answers total) 2 users marked this as a favorite
 
If your financial advisor is a CFA, he is beholden to the CFA Institute Code of Ethics.
posted by dfriedman at 7:41 AM on February 17, 2012


It depends what professional orgs he belongs to, but most of them do. However I'm not sure I've seen one where tax implications are explicitly mentioned, however certainly I would consider this incompetence and a reason to fire them.

(Also going to cash and rebuying a lot of investments rings a bunch of alarm bells to me - especially if you were invested in mostly mainstream investments - make sure you know what his commissions are on the things he bought - that is much more of an ethical issue than the tax thing)
posted by JPD at 7:42 AM on February 17, 2012 [1 favorite]


You certainly should have been advised of the tax consequences. Your advisor should have prepared a report showing how the new investments' superior performance would make up for paying the taxes over time vs. leaving the investments as is or switching them out on a schedule.
posted by michaelh at 8:17 AM on February 17, 2012


There's a Certified Financial Planner association that includes ethics standards and other qualifications. I'm not entirely sure how common the CFP is; when I was interviewing advisors I was far more interested in their Form ADV than any CFP qualifications. But it seems like a reasonable professional association.

I would fire an advisor who did not warn me about the tax implications of a reinvestment plan. Not so much for the one-time 15% hit, although that's significant, but because I would not trust them to give me a heads up about tax things any time later. Financial advisors are almost never CPAs and don't do your tax returns. But tax management is one of the few things a good advisor can really do for you. They aren't going to pick winning stocks, but they can help you be tax efficient.
posted by Nelson at 8:17 AM on February 17, 2012


Ethical is beside the point, he's a shitty financial advisor. That's like a lawyer advising a client to go ahead and breach a contract without mentioning that he might get sued.
posted by Saucy Intruder at 8:24 AM on February 17, 2012 [1 favorite]


That's stupid. You will now lose all potential gains on that 15% that would have remained i capital. Unlikely that his picks will make up for that fact. Unless of course you have almost no money and/or had a shitty portfolio.
posted by jjmoney at 8:33 AM on February 17, 2012


If he works for a Registered Investment Advisor then they are bound as a fiduciary, which means that they must put your interest ahead of their own. Any potential conflict of interest (commissions, etc) are made clear in the annual ADV-II report (filed with the SEC) that is given to clients when beginning the client relationship and when it changes.

If you are working with a stock broker (representative of Edward Jones, for example) there is no fiduciary relationship as far as I'm aware of.

That said, your advisor may have incorrectly assumed it was common knowledge that capital gains are due when stock is sold. This is likely a matter of poor communication rather than an ethics violation that would hold up with the SEC.
posted by dgran at 9:06 AM on February 17, 2012


That said, your advisor may have incorrectly assumed it was common knowledge that capital gains are due when stock is sold. This is likely a matter of poor communication rather than an ethics violation that would hold up with the SEC.

This. If he were just out to get your money, you'd owe a lot more taxes, probably, as he would have been buying and selling like crazy for the commissions (and thus have short term capital gains taxes, too, which are higher than the long term ones you're talking about.)

It's very typical for an advisor to sell the old stuff and buy the stuff s/he thinks is better- that's why you hired him, right?

And I'd bet he thought he'd mentioned that there'd be capital gains and he may even possibly have done- people who aren't experienced investor hear "capital gains" and very reasonably think "gains," not taxes. (Similar to hearing "profit" and not thinking "taxes on profits" though if you're a business owner, you'll "hear" the tax part, just out of hard experience.)

I work in the finance industry and if he's any good at all, he'll feel terrible that he wasn't clearer. Also, he'll make sure to be clear to every client from now on, so your telling him will be a service to his other clients. Because of a similar blockheaded communication error years ago, our office now gives people an estimate of their gains and a very rough estimate of what the taxes will be from it.

Before you fire him, have a heart to heart and tell him you're shocked and appalled at the tax hit you've suffered and you're questioning your ability to work with him. You would have had to pay the taxes sooner or later, but it's very reasonable to not want them all at once and to know to expect them. You'll know after your conversation whether or not he's someone you want to work with at all.

The downside of dropping him is that whomever you find to replace him will likely have his or her own ideal portfolio and will want to tell what this guy just bought.
posted by small_ruminant at 10:53 AM on February 17, 2012


and will want to tell what this guy just bought.

...will want to SELL what this guy just bought.
posted by small_ruminant at 12:36 PM on February 17, 2012


Your FA will have certifications that fall under FINRA. You can use Broker Checker to see their certifications, any complaints, etc. about the individual. Some other useful links: Common Investor Problems, Avoiding Problems with your Broker, Filing a Complaint.

Mind you, the comments about poor communication are important to remember before you complain to FINRA. You should always speak with the FA's Principal (the individual who supervises the FA) first with your concerns prior to moving on to FINRA.
posted by cyniczny at 1:23 PM on February 17, 2012


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