FAQs

Adviser Choice

FAQs: How To Select a financial Adviser

The Facts

Choosing a right thinking, competent financial adviser is a vital buying decision that requires serious homework. Studies show most financial consumers can’t distinguish key differences in adviser services, nor in the advice standards that often determine an adviser’s motives. This failure to investigate and learn enough about these differences matters, and can leave your future exposed to unnecessary risks.

Bottom Line

Failure to select wisely can mean real losses up to 20%, 30%, or more, in long-term account value. Invest some time with these FAQs to ensure your money faces minimal conflicts of interest, is in competent hands, and is working to secure your financial health and well-being.

Beyond Titles, Clichés, and Clever Marketing

If you are confused by the financial advice industry, you aren’t alone. Aside from the mind-numbing jargon and technical minutiae, the industry is full of charming, dynamic, persuasive sales people who don’t lend clarity to the whole purpose of the client/adviser relationship: to grow and protect your wealth. Let’s examine core selection criteria, key advice differences, and why the distinctions matter for your money. These criteria will help you see through the confident sales pitch, and to focus on substance and better decision-making. Don’t Trust (or sign) until you can Verify these three key criteria:

  1. What are your needs and expectations? A strategy with ongoing advice and accountability? Or a product sale or series of one-off transactions?
  2. Does the operating and investment philosophy, business model, and advice standard align with your needs?
  3. Is there transparent discussion of “all-in fees”; and clear disclosures of any conflicts?

Tale of Two Standards: Client Loyalty vs. Divided Loyalties

Standard 1: Pure “fiduciary advisers” serve 1 master – the client. These stand-alone RIAs are a minority in the industry. Pure, meaning no hidden motives: no pay incentive from product sales; no referral fees from product sellers; no insurance commissions; no loads, sub-TA’s, or 12b-1 fees from mutual fund companies; no paid vacation for achieving sales quotas, etc. Loyalty to the client’s “best interest” is a legal obligation under this fiduciary standard of care. Advisers are paid for the ongoing advice they provide, independent of the products they may use on behalf of their clients.

Standard 2: Non-fiduciary insurance agents, bank reps, or brokerage reps (aka registered representatives, or brokers). The business card might say adviser, but the business model they operate under is built to sell you proprietary or affiliate products. The incentive in a sales-driven environment is to sell you higher commission products, even when lower cost, superior alternatives exist. To further muddy the incentive waters, this broker model is often combined with an advice model (“fee-based” hybrid or dual-registered RIA models). It’s estimated that 80%-90% of “financial advisers” operates under these models. Loyalties are divided in both these models between you, the broker/adviser, and the corporation(s). This presents multiple conflicts of interest that can bias the recommend and disadvantage your money. Disclosures under these models are usually murky, deceptive, and often non-existent.

Why Advice Standards Matter

Conflicted advice legally siphons millions of dollars away from unsuspecting consumers every year. The lack of clear disclosure along with deceptive sales and marketing gimmicks make it hard for consumers to know if the adviser’s recommendations are in your best interest. Certainly, you would agree it’s important to know what may be driving the financial advice before you sign an agreement. While neither standard guarantees competence, the pure fiduciary standard is a smart, safer starting point because it minimizes conflicts of interest and better discloses conflicts which may exist. Below we’ll shed a transparent light on standard industry business models in more detail, look at typical investor challenges in evaluating services, and give you some questions and suggestions to help you find a competent adviser to best meet your needs.

Questions to Help You Make a Good Decision

You must learn enough so you can make well-informed decisions. Most people spend more time planning a vacation than they do their financial future – including with whom to trust for reliable, competent advice. Selecting a right thinking, competent adviser is an investment that could fund the cost of many vacations over time.

Q: What are your needs or expectations for a financial adviser?  

Many perceive an adviser is about timing the markets ups and downs, buying investments that beat the market, or finding the next Amazon. This thinking is limited, and a proven false premise that leaves one prey to hyped sales talk about guaranteed protection or killer performance levels. Over 100 years of market evidence makes clear that most professional investment managers can’t and don’t outperform the market they are measured against. More important, this mindset won’t arm you with planning AND investment strategies to weather market cycles, adapt to life transitions, or help you effectively manage the unique risks that may threaten your path to financial security.

There are two primary choices: a (fiduciary) advice-driven adviser that provides you with ongoing advice and accountability; a (non-fiduciary) sales-based broker, transaction business. The right fit depends on your needs.

Q: Why an advice-driven adviser might help you better navigate your future?

A competent adviser should ask you questions until he/she understands enough about you and your goals, so they can help you design a plan that reflects your priorities. Sound strategy built around your facts and circumstances, reduces your risks and increases your odds for achieving the goals that are most important to you. In the process, the adviser will raise your awareness and understanding of various facets of your financial life beyond investments (i.e. savings, retirement planning, estate planning, asset protection, insurance, hidden risks, etc.). The advantage is greater clarity and increased confidence that your decisions are consistent with your goals, as well as to avoid costly, ill-informed emotional mistakes that plague many people who have no plan.

Q: When should you hire an adviser or get a 2nd opinion about your situation?

The answer will vary with your circumstances. In our experience, most people start thinking about getting help between their early 40’s and early 50’s. When contemplating the transition to retirement many concerns often come to light. The most common being: how long will your money last and will you need to make lifestyle changes as retirement nears? The calculation can be very complex when thinking through legacy vs lifestyle trade-offs and the estate planning, investment and income planning, tax planning, tax deferral options, account structure, security placement, distribution strategies, etc. A competent adviser will simplify this for you in plain English and give you a clear picture where you’re headed and if any adjustments are needed.

Q: How can you compare financial advisers and brokers?

The key starting point is to know how the adviser gets paid, and how much. But there can be layers you need to understand to get to the real “all-in cost.” That’s the number that matters for your money. Clear, transparent, documentation is critical. The second key point is to forget about titles. They mean virtually nothing. Focus on the type or standard of advice that’s being offered (because many brokers advertise as advisers). These two keys will help you better evaluate the potential for poor or conflicted advice.

Point 1: The three compensation models for investment professionals

Comp Model 1: “Fee-only” – pure fiduciary: paid to provide ongoing advice by an asset-based fee that varies with amount of assets. Some charge hourly or fixed fees depending on services. Fiduciaries are also known as:  Registered Investment Advisers (RIA firm) and IAR (adviser). Conflicts: Fact is, conflict free advice doesn’t exist. Still, the pure, independent fiduciary model is the most transparent and accountable to you because by law the fiduciary must put your interest before their own as part of an ongoing relationship. This is what is meant by the “best-interest standard.” Simple, clean, transparent.

Comp Model 2: “Commissions” – non-fiduciary: paid to sell products or services; includes: bank registered reps, mutual fund reps, insurance agents, and brokers. Conflicts: registered reps are incentivized in various ways to sell products which may be high priced or not appropriate for you. They are held to a “suitability” standard which means they can weigh the interest of the corporation (bank, broker, mutual fund, insurance company) above your interest in their recommendation That’s not in your best interest. Fee disclosure is often buried in pages of cryptic fine print; sometimes not required; and the incentives may not be at all apparent.

Comp Model 3: “Hybrid/Dual-Registered/Fee-based” – non-fiduciary and/or fiduciary: paid to sell products or services and/or to provide advice (called hybrid or dual-registered); may include: registered reps, insurance agents, and brokers and may also be labeled independent registered investment advisers (RIAs). NOTE: the use of “fee-based” is misleading; it’s NOT the same as “fee-only.” Confused yet? A hybrid model lets brokers operate as a fiduciary and collect an asset-based, hourly, or fixed fee. Yet they also can operate as a broker and get paid commissions to sell a whole range of products and services. The sales pitch here is that by offering fee and commission-based products they can offer a full array of services to meet your needs…..only in a perfect world of fantasy.  

Conflicts: The pitch is misleading. Mixing the “best interest” and “suitability” standards creates a confusing situation at best. The reality is that “fee-based” blurs the lines of accountability, creating confusion and possibly multiple layers of costly conflict between you and your money. How do you know when they are operating as a fiduciary or as a broker? The lack of candid disclosure that typifies the industry makes it nearly impossible for consumers to know where they stand.

NOTE: Whenever you see “Securities offered through ABC broker-dealer, Member FINRA/SIPC” you are dealing with a broker. Along with this disclosure should be a plain English discussion of what potential conflicts this can present.

Point 2: Titles Confuse and the Tale of Two Standards  

Q: Titles: Can you rely on them?

NO! You can’t rely on the myriad titles in the industry because they aren’t tied to any standard (i.e. financial adviser, wealth manager, financial planner, financial consultant to name a few). None tell you anything about competence, compensation, credibility, or the conflicts that may working against your money.

Check out the SEC-NASAA Investor Bulletin called Making Sense of Financial Professional Titles. https://www.sec.gov/files/ib_making_sense.pdf

To further demonstrate the fallacy of titles, the table below shows that investment registration doesn’t match investment titles. A registered representative (bank reps, mutual fund reps, insurance agents, etc.) can market themselves as a financial adviser, blurring the lines of what should be a very clear difference in broker vs fiduciary standards. Unsuspecting investors are frequently fooled by this chicanery. The table also illustrates the divided loyalties that exist under the stand-alone broker and hybrid business models. It’s not a perfect world and these differences matter for your money.  

Given the difficulties full, fair, and clear disclosure present in real life situations, how will you know when an adviser “switches hats” from being a fiduciary to a non-fiduciary broker or agent? Centuries of trust law tells us that the best way to manage conflicts is to avoid them. Why risk it when the uncertainty can mean severe dilution to your money?

Q: Advice Standards: Fiduciary or Non-Fiduciary? 

*NOTE: there are multiple titles that are used in the industry; none has any standard or legal status

Q: Aren’t these so-called differences in standards semantical?

No. Sometimes the differences are subtle; sometimes stark. Economic consequences can be drastic. Many firms use fiduciary language in their advertising, yet they deliver brokerage services. Ask yourself why someone who is registered and licensed as a broker advertises as a financial adviser? That’s a true lack of candor and transparency. There is a stigma with the word “broker” that started back in the day of the “stockbroker.” You don’t hear that title anymore because as commission prices began their descent, churning stock accounts became less lucrative; the tactics evolved to selling different share classes of mutual funds, insurance products, hedging instruments, and alternative investments. And registered reps (aka brokers) were allowed to be called “financial advisers” by the powers that be.

Q: Fiduciary Status: if there isn’t a difference that matters….

  • Why don’t brokers use titles that are consistent with their registration status?
  • Why do brokers co-opt fiduciary language even though they aren’t held to the same fiduciary standard?
  • Why would a broker sell a variable annuity (VA’s) to someone inside a retirement account? Hint: VA’s pay very large, upfront commissions.
  • Why do some 401k brokers and recordkeepers offer “fiduciary warranties”? The artfully drafted fine print (if you can find it) ultimately offers no real “protection” to Plan Sponsors.
  • Banks, brokerages, insurance, and mutual fund companies fought the proposed DOL Fiduciary Rule for over five years. What did they have to lose from the Rule’s increased transparency and accountability?
  • Why, according to Plan Sponsor Magazine, do less than 20%* of financial professionals serve as full 3(38) fiduciaries to 401k Plans, and agree in writing to act as the fiduciary for the Plan’s investments? Shouldn’t the investment professional stand willing to accept responsibilities for selecting and monitoring plan investments? Yet more than 80% of Plan advisers fail to do so.

These are just a few examples. There are scores more. Subscribe to www.investmentnews.com. It’s free. Every day multiple headlines detail abuses that started with undisclosed and/or confusing conflicts of interest.

I will serve just enough to make the maximum profit

Seth Godin

This thinking might be considered a good business model; is that the thinking you want working for your money and your goals? Fiduciary status matters for accountability, responsibility, and liability; don’t trust until you verify!

Q: What services do you offer? 

There are two primary service categories that an investment adviser performs:

1) Investment Management: is generally more straightforward to understand

2) Financial Planning: is a term of art. This is where gimmicky product sales, investment lingo, and sales hype can get very confusing.

Many will do both (or market both) in varying degrees of depth and competency.

Q: Investment Management: What is your investment philosophy?

Start with: “What is your investment philosophy?” And see what they tell you. Here are a few follow-ons to keep things in proper focus:

  • How are risk, return, income, and taxes considered against your goals?
  • What discipline is in place to select, allocate, and monitor your investment dollars?
  • What type of investments are used – active or passive? Passive is almost always a better approach because it keeps your costs low and let’s more of your money work for you.
  • How is the adviser paid – from proprietary inventory? From affiliates’? From mutual fund or insurance companies? From banks or brokers? And how much? Where is that disclosed in writing?
  • Do you outsource the investment management? Do you pay additional for this or is it deducted from the advisory fees?
  • How frequently do they trade your portfolio? Active trading has explicit and implicit costs that eat into your principal, creates taxes, and works against your long-term wealth accumulation.
  • What are the “all-in” costs (adviser fees, investment cost (expense ratios and management fees), trading costs (explicit and implicit), and tax exposures?

It’s important to think right about investing. It’s equally important to plan well around your investments. A product sale or broker mentality doesn’t perform this function well because planning strategies require ongoing commitment, communication, and adaptations.

Q: Comprehensive Financial Planning: What is it?

A Cerulli & Associates study noted that close to 60% of firms market they are financial planners; yet only 30% truly offer financial planning.

Financial planning is an overused, under-defined term in the financial industry. There is no consensus or standard definition, so be sure to ask what “planning” means. Ask to see examples of other Plans and how their planning will benefit you. A thoughtful, well-developed financial plan can be an excellent road map to guide your decision-making; it can also be a trap through which you can be sold various products that may not serve you well.

For example, insurance, annuities, and guaranteed income products are hot-sellers for brokers because many of them carry very high commission rates. They know how to touch the right emotional buttons to sell you all the bells, whistles, and gimmicks that are embedded in many of these products. People get lost reading contract legalese that requires financial savvy and forensic skills. Yet the costs very often exceed the benefits at great dilution of investor wealth. If you own or someone is trying to sell you these type of products, be very sure to get a dissenting opinion so you can compare.

Are alternative ideas presented? Is there a difference in cost between the alternatives? A good adviser is looking out for you and will do a transparent, thorough due diligence of cost vs. benefit. Below are a few key categories that should be part of understanding what financial planning services are provided:

Key Financial Planning Considerations

  • Retirement Planning
  • Estate Planning
  • Tax Planning
  • Insurance Planning & Risk Management
  • Business Succession

Q: Will you work with my other professionals?

If you have professionals you work with already, an adviser should be willing to work in concert with these other advisers toward achieving your goals.

Q: Do you prefer to work with other advisers? Do they pay you get referral fees?

If an adviser refers you to another professional you want to be sure to understand the motive. Any referral fees should always be fully described, disclosed, and discussed in as much detail as you need to be able to make an informed decision.

Q: What is your ideal client?  

It’s good to ask this question so you know how familiar an adviser might be with your type of situation.

Advisers may be generalists, or many serve a focused niche (i.e. specific industries, functions, or disciplines). This could include planning and/or investments. Some serve businesses, corporate executives, or individuals. Some have established minimum dollar amounts for investment. Regardless, an experienced, transparent practitioner will help you understand their services, fees, and strategies. If they avoid direct answers to your questions or can’t explain these to you in plain English (and in a written agreement) it’s a good sign to keep looking.

Be sure you are comfortable with the overall fit.

Q: What kind of client service can you expect?  

Will you be dealing directly with one person? A team? A 1-800 number? You’ll want to know what to expect or let them know what you expect.  What access to your information will you have? How will ongoing results be communicated with you and with what frequency?

Q: What regulatory safeguards are in place for your money?  

Are assets custodied with a third-party, high-quality custodian? What level of discretion will the adviser have with your money? Are there any regulatory infractions (unlawful or unethical breaches) by the firm or the adviser?  Do they carry E&O insurance? Are they bonded?

Here are some other resources you can use in your due diligence:

https://brokercheck.finra.org/

https://www.adviserinfo.sec.gov/IAPD/default.aspx

http://www.nasaa.org/about-us/contact-us/contact-your-regulator/

Q: What experience or credentials can help you evaluate their services?

Like titles, industry credentials often confuse more than inform. It’s easy to get lost in the jargon and the alphabet soup. For example, a broker can be titled as an adviser or wealth manager, asset manager, financial consultant, etc. Similarly, a Chartered Financial Analyst (CFA), Certified Financial Planner (CFP), or an Accredited Investment Fiduciary (AIF), can operate as a broker or a fiduciary. While these are worthwhile credentials, alone they don’t truly tell about anything experience, operating philosophy, business model, or transparency. All which are vital factors in understanding how your wealth will be managed.

Designations: Not all designations are equal. This A-Z guide will give you a synopsis of the issuing organization, prerequisites, education requirements, and accreditation if applicable. 

http://www.finra.org/investors/professional-designations

Q: How much should you pay?

Cost must be addressed because it’s a key input in the investment equation. The answer will vary with your circumstances and the model you choose. As part of your duty to your financial future, you’ll need to know the “all-in costs.” The “sticker” price might hide costly details. Here is a summary of various costs you need to assess. A reasonable range for all-in cost depends on asset level and services provided. With assets between $1-$10 million, all-in costs should rarely exceed 1.50%. Tiered-pricing trends lower with larger asset bases.

All-in Costs = Adviser Fees + Broker/Sales Fees & Commissions + Fund Cost + Trading Costs

This list below isn’t comprehensive, but it provides a clear framework for evaluation   

Universal Costs: Whether you work with an adviser or broker or hybrid, these costs below need to be factored into the “all-in cost” calculation.

  • Fund expenses (expense ratios): passive/index ETFs or mutual funds offer low cost access to different markets (range: about 0.03%-0.40%). Active funds invest in these same markets while attempting to beat the index averages. They seldom do, mainly due to their higher costs (range: about 0.30%-1.50%).
  • Trading costs: commission and bid/ask spreads can add up. Commissions and spreads have declined over that past few years, but higher trading activity creates higher costs and can be a weight on your investment returns. And they can also create a heavier tax burden.

Adviser Model Costs

  • Asset-based investment advisory fees: 1.0% is a good starting point. With a larger asset base pricing should tier-down. Wrap fee accounts often contain various extra fees.
  • Flat or hourly fees: financial plans are often included in the asset-based fee or is otherwise disclosed. Stand-alone costs typically range from $2,000-$10,000 but could be higher depending on asset size and scope of planning. Some advisers may charge monthly or annual retainers.

Broker/Sales Model Costs

  • Front-loads and commissions: front-loaded products like mutual fund A shares, variable annuities, index-universal life, and other forms of life insurance can front-load commissions that range from 3%-10%. This comes directly off the principal before your money can be put to work. New contributions may also be subject to this onerous hit to your principal.
  • Rider options: insurance and annuities can also sell multiple rider options that add to your annual costs, and can range widely from 0.10%-1.0%, or more).
  • 12b-1 fees: usually about 0.25% annual (can be higher or lower)

Hybrid/Dual-Registration Model Costs

As the name implies, costs from the Adviser and/or Broker/Sales model can and often do apply and can be very hard to know exactly what you’re paying or the motive for the advice being offered. You can see in a hybrid/dual-registered model where all the above costs can come into play, this can be very daunting to understand. A lot of investor dollars are lost over time due to this lack of understanding.

Q:  Cost vs. Value: How can you measure an adviser’s value to you? 

Quantifying an adviser’s value is part art and part science. The Dalbar studies show how individual investor behavior (trying to time markets) can reduce returns by over 4% per year. The Vanguard, Envestnet, and Morningstar studies show that advisers can add up to 1.5% to over 3% per year in value by controlling cost, behavioral coaching, re-balancing, asset location, spending strategies, and using total return vs. income only investing.

Here again, it’s important for you to understand the services that are provided, the adviser’s experience and competence level, and which of these services will benefit you.

Q: Is a large brand name firm going to offer you the best suite of services?

An A-Z suite of products & services at your fingertips. Awesome! Easy and convenient, right? Not exactly. Convenient doesn’t mean they are designed to work in your best interest. In fact, these are business models with layers of conflicts, and generally offer sales-driven, boilerplate solutions. Sounds good on paper and in the marketing materials. It’s a huge misconception that a bigger firm or brand name is safer and has more resources that can help you. Remember, the selling person is representing a large institution with shareholders and a corner office with sales quotas whose interests stand between you and your goals.

Strong Suggestions

It’s a good idea to get two or three differing opinions so you can compare and contrast.

Beware if you aren’t sure what products or strategies will be used. If you don’t understand, make the adviser explain it to you in easy to understand terms. There’s no shame in asking before an agreement is signed! A right-thinking adviser will be happy to help you understand what they are doing for you, and contrast it with other options.

Beware the financial supermarket (i.e. one-stop shops such as banks, mutual fund companies, and insurance companies) who offer a nice sounding “convenience” factor. Take note: they’re driven by scale economics, sales quotas, and shareholder interest. Translation: boilerplate solutions, layers of bureaucracy, conflicted advice that stand between you and your money. Not the best place to grow and protect your wealth. [LINK]

Beware the sales person who tells you there is no cost to you. There is surely a cost and you are surely the one who will pay – even if you aren’t writing a check. This lack of transparency suggests they are hiding something or they don’t understand the product. Not sure which is worse. Neither is good.

Beware the dabblers. For example, a CPA who doubles as an investment adviser isn’t likely to be a skilled investment adviser or planner. Do you prefer a jack of all trades or an expert to grow and protect your money? Let them give you tax advice. See an investment professional for your investment advice.

Summary

It’s a safe bet you’ll never find an adviser ad that touts advice full of conflicts, looking to profit at your expense wherever possible!

Do some reflection to understand your needs and expectations. And evaluate the evidence on operating philosophy, service offerings, and service standards.

The best advisers are very transparent about everything – and will walk that talk until they earn your trust. A mutual fit is in the interest of both parties. The pure fiduciary model is an excellent starting point to evaluate who you want to work with to secure your future.

Everything clear? More questions? Discover why the difference matters to your financial security.

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