Posted by on Dec 15, 2014 in Blog, Columns, Featured |

By Jason Zweig | 1:04 pm ET  Dec. 12, 2014
Image Credit: Christophe Vorlet

Time and again, investors are told to read the disclosure documents before they invest or hire a financial adviser. And so you should. But the required disclosures shouldn’t be the end of your conversation when you select an adviser; they need to be the beginning.

 Consider a regulatory action pending in Texas claiming that a financial adviser, Frederick E. Mowery, recommended that his clients use a brokerage firm that allegedly charged excessive fees; failed to disclose payments to him from that firm; and didn’t disclose a bankruptcy filing. Mr. Mowery denies all the charges, but the situation is a reminder of the importance of not accepting facts on faith alone—and of asking questions that go well beyond the disclosures given.

Last month, the Texas State Securities Board, which regulates investment advisers in the Lone Star state that manage $100 million or less, filed an administrative notice against Mr. Mowery and his firm, Mowery Capital Management of McKinney, Texas, which manages about $35 million. Mowery’s disclosures, according to the regulator, hadn’t told clients all they needed to know to make an informed decision about the firm’s services.

According to the notice, between January 2012 and May 2014, Mowery earned approximately $472,000 in undisclosed fees from the brokerage firm that executed its trades. The securities board also claimed that Mowery’s clients paid trading charges up to twice as much as other customers of the brokerage, even though Mowery claimed to use “discount brokers.” The regulator also asserted that Mr. Mowery hadn’t disclosed, as he was required to do, that in 2005 he had filed a bankruptcy petition. Finally, said the securities board, Mr. Mowery had plagiarized a research report that was posted on the firm’s website.

In a response filed this past week, Mr. Mowery denied “each and every allegation.” A spokesman for the Texas State Securities Board, which is seeking to revoke Mr. Mowery’s advisory registration, declined to comment on the case while it is pending. The brokerage firm that executed Mowery’s trades, Worth Financial Group of Dallas, didn’t respond to requests for comment.

The case will be decided after a state hearing scheduled for next month.

Mr. Mowery referred questions to his lawyer, Kevin Edmundson of Austin, Texas. Asked about the purportedly undisclosed fees, Mr. Edmundson says “the allegation is baseless.” Nor, he says, were the trading charges excessive: “We don’t believe the government can prove that allegation, and the brokerage fees charged were consistent with industry standards.”

The lack of disclosure about Mr. Mowery’s earlier bankruptcy filing, Mr. Edmundson says, “appears to be an administrative oversight.” As to the claim about plagiarism, “we deny the charge,” he says.

“There’s no evidence that people were harmed by any of this,” Mr. Edmundson adds.

So how can you make sure you know everything you need to know about a financial adviser before you hire him? You can’t. While most advisers are undoubtedly honest, the few who aren’t can always find clever ways to hide another skeleton in an already bulging closet.

To improve your odds, first search the adviser’s name on Google, which can turn up litigation or complaints you might otherwise miss. Then be sure to read Form ADV, a document all investment advisers must file, at Pay close attention to the discussions of fees, brokerage practices, disciplinary information and code of ethics. Next, review the adviser’s professional history at—bearing in mind that not all complaints or criminal charges may be disclosed there.

Nelson J. Lam, president of the Lam Group, an investment-advisory firm in Lake Oswego, Ore., that manages about $200 million, suggests asking any prospective adviser these questions: Have you been audited by state or federal regulators? Did they find any deficiencies and, if so, how have you corrected them?

Make a special point of asking whether the adviser prepares a customized “investment policy statement,” or IPS, says Donald Trone, founder of 3ethos, a firm that offers ethics training to financial executives.

Such a statement is a comprehensive explanation of your investment goals and how the adviser will manage your portfolio to achieve them. Request a sample copy; it should be at least 10 pages long and not have a cookie-cutter feel. Ask how much time he will need to produce an IPS for you. It should take hours on end, so if the adviser claims it’s “quick and easy,” Mr. Trone says, something is wrong.

One final idea is to write an extremely basic portfolio down on a single piece of paper: 40% in a total bond market exchange-traded fund, 40% in a total stock market ETF and 20% in a total international stock market ETF. Firms like iShares, Schwab, State Street and Vanguard offer such funds for as little as 0.04% in annual costs, or $4 per $10,000 investment.

Show the page to the financial adviser and ask what changes, if any, he would suggest to such a portfolio and how much his recommended portfolio would cost.

If his answer is hesitant, long, complex, or includes the words “tactical” or “insurance products,” he probably makes investment management more difficult than it needs to be. If his recommended funds cost more than 0.5% annually, or the adviser charges more than 1% himself, he makes investing more expensive than it needs to be.

That’s powerful disclosure right there.


Source: The Wall Street Journal