by Jack Waymire
The Securities and Exchange Commission (SEC) has recently ruled financial advisors can begin using reviews on social network and third party websites to help them market financial services. This SEC ruling creates a new source of risk for investors who rely on these financial advisor reviews and ratings to make decisions.
Financial Advisor Transparency
Wall Street preaches transparency, but its business practices say otherwise. It withholds information so you will buy what Wall Street salesmen sell you.
Financial advisor reviews have the potential to increase transparency in a way that is not controlled by Wall Street. Therefore, there is a good chance reviews will make selecting financial advisors a more transparent, safer process.
Paladin Tip: You can be an informed investor if you are willing to commit a small amount of time checking for reviews. An informed investor is Wall Street’s worst nightmare.
Financial advisor reviews give you a powerful voice to provide feedback on your actual experiences. For example, a negative review may help other investors avoid a bad advisor.
Paladin Tip: You may be fed up with Wall Street business practices, but you were powerless to do anything about it. Voice your dissatisfaction on the Internet – the information super highway.
The good news is more advisors will have online reviews. The bad news is the information may appear on several different websites. You will have to search multiple review sites to find the financial advisor information you are seeking.
Paladin Tip: Very few investors use FINRA/BrokerCheck when they vet financial advisors. How many will visit multiple websites to read financial advisor reviews?
The Snowball Effect
There are almost 700,000 financial advisors, financial planners, and stock brokers in the U.S. Less than 1% has been reviewed online. And, how valuable are a couple of reviews if one is positive and one is negative?
Paladin Tip: You have to start somewhere. It will take time before the snowball begins rolling down the mountain and there are multiple reviews for hundreds of thousands of financial advisors.
The Risk of Manipulation
The SEC has published a number of rules that are supposed to prevent the manipulation of reviews. For example, advisors are not supposed to encourage friends and family to post positive reviews. The SEC can publish rules, but it does not have resources to enforce them.
You should assume lower quality advisors will find a way to game the system. Consequently, you should pay less attention to positive reviews and more attention to negative reviews.
Paladin Tip: If all of an advisor’s reviews are positive and language in the reviews is similar, there is a good chance the advisor created the reviews and asked friends and family to post them. Negative reviews help you avoid bad guys.
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