Viewpoint: Can you know if you're getting good financial advice?

The media claims it's easy: pick someone off their best-of list. Most major financial publications have them - a top 100, 200, 400 or even 1,200 list of the best in the biz. You Brits even get lists of the best US advisers.

But here's something those lists never reveal: most of these people aren't actual advisers. They're phonies; simply product salespeople, stockbrokers, employing grammar to enhance their image into more than just "salesperson". Britain's laws differ from America's, but fathoming American rules and how brokers exploit them helps you fathom Britain, too.

Brokers make money from selling products. Plain and simple. Advisers are paid for advice, not product sales. America draws clear regulatory lines between the two. The Investment Advisers Act of 1940 requires anyone giving financial advice to register and conform to strict ethical standards - disclose conflicts of interest, put clients' interests ahead of their own and recommend what they believe best for each client based on that person's individuals goals, needs and their own expertise - what is called the "Fiduciary Standard".

The 1940 Act, along with the Securities Act of 1933, Securities Exchange Act of 1934 and Investment Company Act of 1940, sought to separate salespeople from service people - prevent salespeople from masquerading as advisers, giving phony baloney tips and "recommendations" to make a sales commission.

This was a direct reaction to the Great Depression. Before 1933, separate sales and service roles were unheard of. Salespeople giving "advice" would sell their own products without disclosing any of the many conflicts of interest. Most then believed this practice contributed to the Crash of 1929 and separation of roles was part of the solution. These four laws were the result.

Together, they set clear standards and requirements for brokers, advisers, securities and mutual funds (unit trusts in your lingo). Three laws about products and their sales, one about advice service - quite separately.

Advisors

America has over 640,000 registered financial professionals. A measly 10,500 are registered with the Securities & Exchange Commission as investment advisers. Most of the rest are brokers - salespeople - with a handful of dual-registered folk. Those brokers call themselves advisors - note the "o" and not the "e".

This isn't a mis-spelling or semantic slip - it's intentional and misleading. Most people believe brokers are slime. They trust their own guy but hate the other 630,000. Icky, account-churning, commission-hungry salespeople with more interest in peddling products than their clients' actual needs.

Americans have a better view of advisers, largely because of the higher regulatory standards and lack of sales commissions. Brokers want to shake their own nasty label, so they call themselves "financial advisors", hoodwinking the "o", not "e" for trusting folks who believe they're more qualified and ethical than they really are.

It's quite technically illegal, but routinely overlooked. The world has learned to accept this advantaged lingo. When I was young no one ever called themselves "advisors" in the investment world. Unheard of.

These are the people on almost all these top-of lists. They're salespeople. They're on the list because they oversee the most money among brokers, plain and simple. That's it, nothing else which means they're really good sales people. They aren't usually qualified to do anything else.

Regulatory standards require them to sell you something they believe suitable, but something can benefit them more than the client and still be suitable in the law. They can sell a variable annuity with a 10% commission and no real definable return on investment and call it suitable. They get a new car. The client gets an illiquid, costly, underperforming mess.

Your regulators tried to fix similar issues last year with the Retail Distribution Review, which requires restricted and independent financial advisers (IFAs) to itemise every charge. It bans IFAs from getting kickbacks from any products they sell. But you still run into the same issues as Yanks do. Many IFAs work at brokerage houses. How do you know whether the security they recommend is best? What if it's just something in the house inventory that they want to offload? What if it's better for them than you? How can you know?

Execution-only services face similar problems. The Financial Conduct Authority recently opened an investigation into how funds end up on execution-only platforms' recommended lists - conflicts of interest.

What's an investor to do?

Take heart: It's a nasty world out there, but if you know what to watch out for, you can find the right help. Regulatory standards are nice, but they alone offer little help - believing otherwise presumes regulators, despite their good intentions and large efforts, will succeed now when they have long been unsuccessful in their effort to rein in industry excess (and even fraud).

Ask yourself: does your adviser get to know you? Do they strive to discover everything they can about your long-term goals, financial situation, cash flow needs and other objectives? Do they ask what your money is ultimately for? Do they help you identify your investment time horizon? And do they recommend a long-term plan designed to meet those goals over that entire period? If you answer "no" to any of those, beware.

Then, too, consider their business model. Do they custody assets? Do they work for a brokerage house? Or are they affiliated with one? Do they have any arrangements that could prompt them to recommend a product or security that benefits themselves, their firm or their affiliated brokerage at your expense? Do they earn commissions on trades in your account? Does their fee schedule incentivise them to trade, take undue risk or do anything other than make you money over time? If you answer "yes", beware. You're far better off avoiding those who sell a product for a commission.

Honourable investment professionals are a rare breed but not extinct. Know the law, know the warning signs, and you'll find who you're looking for.

Stock picks for the DIY investor

Of course, you might not be the advice-seeking type. Is DIY more your style? Then DIY with stocks like these.

Swiss-based Novartis is the world's third-largest drug firm by most measures - a very diverse line. Its blockbusters include Diovan, a blood-pressure medication, and Gleevec, a cancer drug. Novartis is well-run, and among the druggies, it sports fatter gross margins (66%). Yet it's cheap versus peers at 14 times my 2014 earnings estimate. Dividend yield? 3.1%.

Another superbly-run fat-gross-margin (58%) firm, of a different style, is Mastercard. Most think it's a credit-card company. But it's also a payments-processing IT firm, albeit growing at a slower, safer rate than Apple or Facebook. It sells at ten times my 2014 earnings estimate.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.