WSJ's Zweig: Beware the Temptation to Invest in Your Financial Adviser

Tuesday, 21 May 2013 07:54 AM

By Dan Weil

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You probably think of a financial adviser as someone who invests on behalf of his/her clients, but now a few clients are investing in their advisers' businesses by either buying an ownership stake in their adviser's firm or lending money to it.

"At first blush, that [the idea of investing in your adviser] sounds tempting," writes Jason Zweig of The Wall Street Journal.

"Most advisers not only have relatively low overhead, but they earn their annual fee — often 1 percent or more of their clients' investments — regardless of whether the markets go up or down."

Editor's Note: An $87,500 Tax Loophole Discovered by Cherry Hill Accountant

And the surge of stock and bond markets may be putting more fees into advisers' pockets.

Financial advisory businesses are gaining in value by more than 10 percent a year on average, Todd Fulks of FP Transitions, which provides such valuations, tells Zweig.

"There's no doubt that it [investing in financial advisory firms] has been coming up more and more frequently," Brian Hamburger, managing director of MarketCounsel, which helps advisers comply with financial regulations, tells The Journal.

But that doesn't mean it's a good idea for average investors to sink money into their advisers. "Such transactions are risky and fraught with the potential for conflict of interest and even fraud," Zweig says.

"For most people, investing with a financial adviser might be a good idea. Investing in a financial adviser is probably a bad one," he writes.

Meanwhile, as financial advisers increasingly depart major brokerage firms to set up their own shops, investors are worried about the advisers' trustworthiness and investment performance, according to a survey from Investor's Business Daily.

"Clients don't want to become a victim of the next Bernie Madoff," Tricia Rothschild of Morningstar investment research firm tells the paper. "They don't want their money to sit in zero-interest accounts. And they don't want to overpay for advice."

Editor's Note: An $87,500 Tax Loophole Discovered by Cherry Hill Accountant

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