Investment Advisor vs Loan Officer

Investment Advisor vs Loan OfficerShould Your Investment Advisor Be your Mortgage Loan Officer.

By definition an Investment Advisor may render advice on financial services such as pensions, life insurance and mortgages.  So, on the surface it looks logical.  But there are scenarios that a consumer must be aware of such as when a conflict of interest may arise.

There is an issue of conflict of interest as an “Investment Advisor” could urge a client to refinance or purchase property in which as the Loan Officer he or she could obtain fees through a self-referral.  Conversely borrowing against ones home equity at the urging of a Mortgage Loan Officer to invest tin the market could be considered by some as risky.  These types of potential transactions put the benefits of the transaction on the side of the investment advisor or loan officer and not the investor or borrower.

This is more prevalent then one would hope, so much so, that in the State of Ohio, for instance, the Division of Financial Institutions refers to it this way  “Acting as Both an Investment Advisor and Loan Officer as Dishonest and Improper Conduct”.

I would argue that the capital markets and in particular the brokerage industry deliberately makes it difficult for the average investor to know the difference between  a “Financial Consultant”, “Stock Broker”, “Investment Advisor”, and “Portfolio Manager”.

There are differences and some of that difference can be found in the Investment Advisers Act of 1940, brokers are held to a different standard than a registered Investment Advisor.  An “Investment Adviser” must act solely in the best interest of their clients.  Meanwhile Brokers are regulated by the National Association of Securities Dealers which does not have a strict fiduciary standard but imposes a “suitability standard”.  If al this sounds like “weasel wording” it’s not but it does raise the specter of how easily investment professionals that wear different hats can get way with poor behavior.

One might expect that the Government might have a say in this to protect the average citizen, and they do.  Back in 2005 the Securities and Exchange Commission (SEC) approved  the “Certain Broker-Dealers Deemed Not To Be Investment Advisers” rule  that officially permits brokerage firms offering fee-based accounts to be exempt from registration and regulation as investment advisers. So although the SEC saw this as a win-win for broker and consumers, Brokers DO NOT have to act solely in the best interest of their clients.

So back to weasel wording, and the SEC see that there is some grey area and requires that brokerage firms must disclose that they offer “brokerage accounts”, not “advisory accounts”, and that the brokers interests may not be the same as those of their clients.  Check you next prospectus’ fine print for these Red Flag statements.

In recent years Investment Advisors have been recasting themselves as Financial Consultants offering wealth advisory and financial planning services, in addition to their “day job” of buying and selling securities.

Now, what if your “Investment Advisor” is also your “Portfolio Manager”.  Normally a Portfolio Manager is a leadership position where the Portfolio Manager works with a team of analysts and researchers to gain market insights to ultimately make the final investment decisions.  However, some Portfolio Managers do their own analysis and research, then use a broker to actually place the trades.

When someone hires a Portfolio Manager they normally fill out an application, outlining general parameters, such as income, risk tolerance and investment goals. With this information, a Portfolio Manager still has a wide range of flexibility with what he or she can trade for the client.  There is a lot of gray where a disservice could be done to a client.

Here is Arizona I got caught up in these gray areas when I hired a Financial Advisor as my Portfolio Manager. From January 2007 until the end of 2011 I had lost 45.6% of my portfolio.  Recently that advisor started promoting himself on local radio station and on the internet as a Loan Officer for a notional mortgage lender as well as a Portfolio Manager and Registered Investment Advisor.

Too many hats ?  I think so. I’m an advocate of building a team to help advise me and my family on financial matters, lawyers for wills and trusts CPA for taxes, Brokers for some capital markets investing and so on.  But don’t be lazy they should be different people not all the same person.Should Your Investment Advisor Be your Mortgage Loan Officer