Financial Fraud and Advisor Compensation

Consider the following phrases: An investment recommendation that is “suitable for you” versus one that is “in your best interest.”  These may sound identical, but there is a difference between the two types of recommendations

The former can be labeled as a suitability standard and coincides with how brokers operate. The latter is the fiduciary standard of care and is required of Registered Investment Advisors (RIA).  In this article spotlight, we highlight one Wells Fargo broker who defrauded clients; and explain the difference between how brokers and RIAs operate.

Article Spotlight: Read the Article

The above article describes how Philip Horn spent over two years profiting from client portfolios.  Among other illegal acts, Horn was guilty of churning and speculating with his clients’ portfolios, causing losses in excess of $700,000 in client portfolios.

Many are baffled that the Compliance Team at Wells Fargo could miss this fraudulent activity for over two years.

Dollars funnel.

While fraud can happen anywhere, it is important to also familiarize yourself with the difference between a suitability standard and fiduciary standard of care.  When brokers provide investment recommendations, they only need to recommend something that is suitable given one’s risk tolerance, assets, financial needs and goals.  Brokers are not required to put someone’s interests before their own, which means they can recommend a “suitable” mutual fund with high commission, even if it isn’t the best mutual fund given a client’s particular circumstances.  On the other hand, RIAs must put your interests above their own.  They cannot recommend a mutual fund for commissions and reasons aside from what is in your best interest.

If using a broker, carefully monitor your account and look for the following:

  • Churning (excessive trading that results in commissions for the broker)
  • Investment products with high fees (load mutual funds or annuity sales, especially if they don’t fit within your unique circumstances)
  • Concentrated stock positions
  • Untimely execution of your investment orders

Whether you are working with a broker or a RIA, it is important to understand how they are compensated and what duty they owe you.  Below is a list of questions we suggest you ask anyone who is providing you with investment advice:

  1. How are you compensated?
  2. Are you legally required to provide me with a fiduciary standard of care?
  3. How do you make your investment decisions?
  4. Do you offer services other than just investment advice?
  5. Will I have a financial plan that is coordinated with my investment advice?
  6. Do you have any credentials? (e.g., CFP©, CFA, CPA, or PFS)
  7. What is your investment philosophy?  Do you invest your personal assets in this manner?
  8. Can you provide me with a reference or two from existing clients?
  9. Can I have a reference from a professional you work with? (CPA, attorney, insurance salesperson)
  10. Do you use an independent third-party custodian?
  11. How often will we communicate?
  12. Do you have any marks on your regulatory record?
    1. For investment advisors, search here:
    2. For brokers, search here:

While it is important to like the person you are working with, the questions above will help you objectively evaluate this person.  In the case of the Wells Fargo broker, many clients never reviewed their account statements, and trusted him as a friend instead of as their advisor.  In a world where professionals can be more opportunistic than trustworthy, it is crucial to ask questions to understand how the relationship between you and your financial advisor will work.