With these increased crimes, punishments have also increased in magnitude. In order to foster a successful career as a future Flanagan planner/ advisor, I must be extremely aware of the various laws and regulations that relate to this field and to the many before me that have fallen victim to these crimes. In the last decade, the financial services industry has seen an extremely negative reputation decline. This has been due to the countless financial crimes that have been conducted.
As an aspiring financial advisor/planner, I must professionally be aware of the various legal problems that exist in this field and ensure I don’t fall victim to committing any of these crimes. Financial planning and advising services deals with helping clients with the various topics: equities, fixed Income. Real estate, insurance, taxes, retirement, and general financial planning. Dealing with clients on a daily basis, brings up many different liabilities. Certain financial advisors or planners must act as fiduciaries to their perspective clients.
As discussed in class, there is a certain relationship regarding an agent and his principal. In my case, as a financial advisor I would act as the agent and my principal would be my clientele. Fiduciary, Is he trust or loyalty I owe to my client, as an agent I am supposed to place my principals Interests ahead of my own. Essentially a fiduciary relationship ensures that my client is given reasonable care, is accounted for, and I display obedience or follow my principals instructions to the best of my ability. In this role, I will always be liable for any of my actions that break the law or this fiduciary that damages my client.
There are also employment opportunities for financial advisors where they don’t have a fiduciary for their client, but rather for the company that they work for (Woodruff, Amanda, “Crime Writer Wins $50 Million Lawsuit Against Her Financial Advisor”). Although this is common, at the same time I must always ensure I treat my client’s finances as if they were my own; with extreme care and integrity. In the last decade financial advisors/planners have especially fallen victim to providing wrong and unethical advice for client’s assets.
There have been many instances where financial advisors will try to sell financial products to a client in order to Just generate larger commissions or fees, Instead of really placing their client’s best Interests Into their financial plan. Although some financial planners have and are currently getting away with this strategy, I personally do not believe it’s sustainable and if anything went extremely wrong with any client’s finances, there could be severe liability issues. A major problem for financial advisors is not picking investments that are suitable for particular clients.
If an advisor doesn’t take the necessary steps to ensure the clients investments suite his or her needs, then he don’t do correctly or fail to do altogether. Not informing clients of what particular investments they are being thrown into, is also a common problem advisors face. Also, not explaining that there is inevitable risk with any investment is a problem advisors run into. The last main problem that financial advisors most commonly fall victim to is not picking investments that match the clients risk level, needs, and financial stability.
When an advisor is more focused on “selling” financial products and generating the best returns for themselves, a client could have a very good basis for a civil lawsuit if he accumulates financial losses (Bundling, Hal M, “Lottery Winner Sues Advisors for Poor Policies”). Many clients may be personally facing this, without even knowing it. Even if these investments that aren’t suited for the client’s particular needs are performing well in a bull market, it is easy to overlook how the advisor chooses the investments. Many clients lack information to realize that they have been sold investments and have not been taken care of correctly.
A good comparison of this issue is to use an example relating to men’s suits. If I were looking for a suit to buy and I purchased one off of the rack in a department store that fit me Just k, but not great, I may not know that there are better options. If I were to get a custom suit allured to my body, it would certainly be better than the suit that I purchased off of the rack. In financial advising, many advisors get away with giving customers suits off the rack to collect more profits for themselves and to do less work.
Clients often times don’t realize this until it is too late and an extreme situation occurs. That is why as a financial advisor it is extremely important to always create a custom plan for your client that fits them perfectly or is “tailored” to meet their needs. Every client is different, Just like every body type is different, and there is no cookie cutter formula hat can be used in financial advising. Since many advisors don’t use this tailored approach, the financial services industry has received a bad name, littered with greed.
If clients have received losses and discover that a financial advisor has misled them, they can bring a civil lawsuit against their advisor to recover losses and damages. As discussed in class, a civil lawsuit is generally between two parties that occur when one party falls victim due to the others actions. If found guilty under the “more likely than not” clause, the victim must be compensated adequately by the defendant for relief. In this particular case, if the advisor is found to have damaged the client “more likely than not” then losses can be recuperated and the victim (client) will be given relief by the defendant (advisor).
Although general market losses are not enough grounds to sue a financial advisor, if it is found that an advisor has been negligent with a client’s investments and has not put their investments into the ones discussed, or investments that match a client’s needs correctly, that advisor would generally lose a civil court case (Woodruff, Mankind, “Crime Writer Wins $50 Million Lawsuit Against Her Financial Advisor”). An example of a civil case against a financial advisor that has recently found headlines in the media, is a previous lottery winner suing his financial planner for bad advice.
Kevin Gawk won the lottery in 2009 and chose to take a lump-sum payment of $70 Million (Bundling, Hal M, “Lottery Winner Sues Advisors for Poor Policies”). Seven’s financial planner gave him detrimental advice that took advantage convinced him to open up a $100 Million Life Insurance plan. Kevin also was encouraged to open up a line of credit in order to buy lavish $10 Million beachfront properties in Malibu. Kevin was single at the time and was taken advantage of in this extreme example of a financial advisor “selling” his customer insurance products in order to gain more commissions.
Kevin later ran into debt problems, sinking into $27 Million worth of debt (Bundling, Hal M, “Lottery Winner Sues Advisors for Poor Policies”). Once Kevin found out he had been misled and damaged by his financial advisor, he brought a civil court case against his financial planner that sued for breaching fiduciary and professional negligence. Although this civil court case is extreme, financial advisors are constantly at risk for misleading their clients, even if hey are doing it discretely in order to gain more commissions and not deal with their clients finances properly (Bundling, Hal M, “Lottery Winner Sues Advisors for Poor Policies”).
In order to truly see how prolific there financial crimes are, another high profile civil court case will be outlined. Best-selling crime author, Patricia Cornwall recently won a civil lawsuit against a financial advisory firm. Enchain, Block & Enchain ALP, her advisory firm was required to pay a relief of $51 Million (Woodruff, Mankind, “Crime Writer Wins $50 Million Lawsuit Against Her Financial Advisor”). The firm was ruled professionally negligent after losing Cornwall $76 Million. It was reported that the advisor used this clients’ money for political contributions to Hillary Silicon’s presidential campaign.
They also wrongly used the principals investment account to fund a private helicopter, a daughter’s bat mitzvahs, and the advisor paid himself $1 Million. These unethical acts of financial fraud and general mismanagement of Cornball’s accounts shows that financial advisors can easily abuse clients’ money. These acts went on for about 6-7 years as well, so it is certainly not hard to hide these acts of crime. Enchain placed Cornball’s hard earned assets into extremely risky securities, without telling her; at the same time he committed terrible acts of fraud with Cornball’s money.
Patricia Cornwall luckily recognized these acts and took the necessary steps to be provided with relief in the form of a civil court case that she indeed won (Woodruff, Mankind, “Crime Writer Wins $50 Million Lawsuit Against Her Financial Advisor”). There are other cases where a financial planner could do much more harm with a client’s money than Just a negligent action. There have been many well documented asses where advisors or planners have committed financial fraud with their clients’ money.
Some general examples of this include: stealing money from clients investment accounts, not investing client money, creating fake account statements, taking a larger fee than what was agreed upon, acting on insider information, claiming investments over or under performed more than they did, and lying to clients about what investments have been chosen. These higher degree crimes, can be taken farther than a civil court case and can escalate to a federal case level. The SEC (securities and exchange commissions) Federal Agency will often federally charge advisors who have committed such investment frauds (United States of America.
US Securities and Exchange Commission. Trading Suspensions). A good example of this is a recent crime committed by financial advisor Mark Springier out of Seattle. This brought him to federal court where he was indeed convicted. Mark Springier took 46 Million of his clients’ money and invested their funds into two risky startups Teraflop and Tamarack respectively, that he himself served as the CEO and chairman of the two companies. He lied to his clients, not telling any of them where their money was actually going.
Eventually both companies failed and his client’s money was lost with both companies failures (Carsick, Coral, “Seattle investment adviser guilty of fraud in $MOM case”). This example of a criminal court case at a federal level, is much different than a civil case. A criminal case is a crime against the Government, on behalf of the “people. ” Instead of Just dealing with relief or compensation of one party to another like a civil case, a criminal case deals with a punishment. If found guilty, the defending party will be subject imprisonment, a monetary penalty, or a combination of both.
Another example of a criminal case regarding financial advisors, is a large case involving insider trading. Financial Advisor Tabor Klein, was recently federally (criminally) sued by the Securities and Exchange Commissions on the grounds of insider trading. Klein learned that the pharmaceutical company Pfizer, Inc. Was going to buy another company called King. He learned about this information after having a drunken dinner with his friend who was working on the investment banking side of the acquisition deal (Phillips, Ted, “Tabor Klein, Financial Adviser, Sued by SEC for Insider Trading”).
Klein acted on this inside information and did so in large fashion. He used his clients’ money and his own, to buy over 60,000 shares of the company King, and sold the shares after the price rose over 39%. This act of insider trading is banned as a federal crime and is regulated by the SEC. Klein acted on information that had not yet been released to the public. The federal crime of insider trading eliminates asymmetric information in order to stop these tip-offs and information gossips from reaching the market in the form of transactions, so the market operates more efficiently and fairly for all traders.
Tabor Klein will likely be found guilty for his obvious criminal actions of insider trading (Phillips, Ted, “Tabor Klein, Financial Adviser, Sued by SEC for Insider Trading”). A financial advisor/planner always needs to be aware of civil and criminal law implications, yet they also will need to arm themselves with various licenses, in order to legally sell certain investment securities or collect a commission based fee for their services. As an aspiring financial advisor, I will certainly need to pass various exams in order to generate my salary which is based on a commission or fee based on arioso investment/balancing services.
The first main regulatory agency is the FINER. The FINER stands for the financial industry regulatory authority. In order to become a fully licensed financial professional, this approved, self-regulatory organization, offers several license exams for financial professionals to take (Sense, Mark P, “Breaking Down Financial Securities Licenses”). The first license that is essential for a financial advisor is the Series 6 exam. This excerpt from an article written by financial professional Mark P.
Sense, outlines the Series 6 exam, “It allows its holders to sell packaged” investment products such as mutual funds, variable annuities and unit investment trusts… This license is also required for insurance agents that sell variable products of any kind, because securities constitute the underlying investments within second major example also provided by the FINER, is the Series 7 license. This license essentially allows all general investments to be sold. This includes equities, fixed income, and options (put and call).
The only topics it doesn’t cover are selling/ collecting commission on derivative based securities (covered in Series 3 exam). After acquiring the Series 6 and 7 exams there is one last essential license to pass. The last exam is given by the NASA rather than the FINER. The NASA or the North American Security Administrators Association oversees three licenses (Sense, Mark P, “Breaking Down Financial Securities Licenses”). The main license that is applicable for financial planners is the Series 63 license. This license is required by a Series 6 and 7 holders in order for the licensee to construct business with clients within the State.
In order to tighten regulation from the federal level and help the SEC from state eased financial regulation, the Uniform Securities Act was enacted. This act further protects investors from a state side and it regulates based on specific state laws that each specific state carries regarding financial regulation (“Uniform Securities Act. ” Investigated). These various licenses have increasingly focused on ethics within the license exams, due to the recent overwhelming amount of financial fraud that has occurred.
For any financial advisor/planner to be successful in his or her line of business, they must be licensed with the Series 6, 7, and 63 licenses to continue uncial advising on a legal level (Sense, Mark P, “Breaking Down Financial Securities Licenses”). In regards to civil lawsuits, it can be argued that financial advisors and planners don’t have the luxury of a limited liability like other financial service professionals can enjoy. Other related fields of work are much more shielded to direct liability in regards to civil cases.
For instance, any finance professional that works for a mutual fund for an incorporated company, would enjoy a bit more limited liability behind the corporate entity, than a financial advisor or planner would. A civil case against a tall fund, for instance, would not target individuals but rather it would target the corporation as a whole (Corporations and Limited Liability. Kahn Academy). Since the corporation is a legal entity, anyone preparing a civil case would not be able to target an individual such as a particular analyst for a civil case very easily (unless under extreme circumstances).
Essentially a financial planner or advisor must take responsibility for their particular actions. There is no protection for federal crimes, such as insider trading for a financial professional regardless if he worked for a corporation or not. There is still a liability issue that financial advisors and planners have worse off than an individual working for a corporation. For example, if I am a financial professional working as an analyst for a mutual fund, Vanguard for example sake. If I were to engage in a criminal act, my mutual fund manager at Vanguard would most likely be mainly responsible for any crimes committed.
There is a much better chance that I would be able to get away with my crime as an accomplice or have a much less severe punishment since the manager or more senior position would likely take the blunt of the criminal charge. Essentially behind a corporation’s liability, it is much harder to be recognized for individual acts of crime unless the person assumes a managerial/head position or the case is very severe. This contrasts for a financial advisor or planner, who is constantly under a microscope for his or her advisor/planner is therefore much greater, because advisors have complete control of client’s monetary accounts.
This responsibility is much greater than other average financial Jobs. With this great amount of responsibility, comes legal responsibility. Therefore financial advisors and planners will always take full responsibility for their actions in the eyes of the law whether there is a criminal or civil case against them (Corporations and Limited Liability. Kahn Academy). Aside from specific legally binding areas an advisor or planner must watch out for, the COP certification is a non-legally required, yet extremely comprehensive financial designation any financial advisor/planner must consider.
Although the COP is not legally required, this designation allows financial professionals to increase their legitimacy and focus on ethics. With the increased competition in the financial services industry, there are constantly higher education designations or degrees that an help gain a leg up on the competition. The COP is essentially the MBA for financial planners. This time consuming and comprehensive financial designation that stands for Certified Financial Planner, is a detailed designation that allows holders to be fully specialized in their field.
Although not required by law, the COP certification is extremely important for any candidate that wants to fully master the field of financial planning. In addition to giving yourself a designation at the end of your name that can be impressive to clients and others in the field, it will give you a complete asters of financial planning. This designation is similar to the SFA or CPA, but allows financial advisors or planners to further specialize in their perspective field. There are several requirements that a financial professional must have prior to sitting for the COP exam and receiving their designation.
The perspective COP must hold a bachelor’s degree and have specific course work or another type of degree to challenge the education requirements (“Become a Professional”). Challenges include: Ph. D. In business or economics, Doctor of Business Administration, Licensed attorney, CPA, Chef, CLIO, and the SFA. After the education requirement or challenge is accepted and the COP exam is passed, you must register three years of work experience in the financial planning/advising area in order to be a fully registered Certified Financial Planner (“Become a Professional”).
Although this designation is not required, if a perspective employer does not have a master’s degree, it is a great way to demonstrate complete mastery within the financial planning realm, while helping to avoid the common stereotype that financial advisors don’t make ethical decisions. The financial services industry has drawn extremely negative attention due to the cent legal problems it has experienced. As a future financial advisor and planner, the issues discussed in this analysis of the legal issues that go along with the profession will prove to be extremely beneficial to my career.
Dealing with clients on a daily basis with complete responsibility for their finances, is a great undertaking that has many liabilities that can come with the role. I must constantly be aware of these in my future and the implications that a bad ethical decision can have. The risk of civil or criminal lawsuits and the suspension of work from practicing without squired licenses, is a constant threat of having the position of a planner/advisor. Having the correct knowledge of these legal issues and insuring that I always make of my success in the industry.