Adviser Selection

See through the confident sales pitch and focus on substance and better decision-making. Don’t Trust (or sign) until you can Verify these three key criteria:

Key Selection 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 firm’s 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

Guess what. It isn’t always clear who does what. Nor who is working for you or for someone else’s interests.

Standard 1: Pure “fiduciary advisers” serve one master – the client.

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

This group, aka registered representatives and 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” operate under these models. Serving multiple masters means 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.

See the difference?

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. You must learn enough so you can make a well-informed decision.

Certainly, you would agree it’s important to know what motives 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 provides more transparent disclosure. Below we’ll shed a transparent light on standard industry business models, look at challenges you face in evaluating services, and give you some questions and suggestions to help you find a competent adviser to best meet your needs.

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.

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.

The right fit depends on your needs: A (fiduciary) advice-driven adviser provides you with ongoing advice and accountability; a (non-fiduciary) sales-based broker, transaction business is more for the do-it-yourselfer, though many of these brokers call themselves advisers. Buyer be aware.

The advantage is greater clarity and increased confidence that your decisions are consistent with your goals, as well as to avoid the costly, emotional mistakes that plague many people who have no plan.

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. Investment decisions, estate planning, 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.

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.

There are 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 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, 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. Hah!

Conflicts: The pitch is very 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.

Not one bit! The myriad titles in the industry (i.e. financial adviser, wealth manager, financial planner, financial consultant to name a few) aren’t tied to any standard. None tell you anything about competence, compensation, credibility, or the conflicts that may working against your money. 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.

Check out what industry regulators think. The SEC-NASAA Investor Bulletin called “Making Sense of Financial Professional Titles.” www.sec.gov/files/ib_making_sense.pdf

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. What are they hiding?

Given the difficulties that 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?

Titles Confuse and the Tale of Two Standards

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

These are just a few examples. There are scores more that occur every day. If you subscribe free at www.investmentnews.com scan the daily headlines that detail abuses that started with undisclosed and/or confusing conflicts of interest. If the financial consumer understood the conflicts beforehand they would surely not have signed up.

There are two primary service categories that an investment adviser may perform:

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 all get thrown into the mix and can get very confusing.

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

An investment manager is the person(s) directly investing in the securities that go into a fund. Whereas, investment advisers use investment managers and buy funds on behalf of their clients. Often the investment manager is owned or employed by the bank, mutual fund or insurance company, who also employs the investment broker/adviser. This is important to understand because often the corporation gives incentives to the broker to sell these proprietary products, even when they may be inferior to other products. Huge conflict of interest. It happens a lot. Buyer be aware.

• 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?
• How are risk, return, income, and taxes considered against your goals?
• What discipline is in place to select, allocate, and monitor your investment dollars?
• Do they 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. Yet planning is often mislabeled and misused to sell a vast array of products. Buyer be aware.

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 and keep you on track; 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 types 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? What are the tradeoffs in 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

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.

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

www.brokercheck.finra.org/
www.adviserinfo.sec.gov/IAPD/default.aspx
www.nasaa.org/about-us/contact-us/contact-your-regulator/

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

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 to evaluate costs.

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 both 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 this model can be very daunting to understand. A lot of investor dollars can be lost over time due to this lack of understanding.

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. Then there are intangibles like motivating you to take action where there may be gaps or contingent risks you need to have covered. 

Here again, it’s important for you to understand the services that are provided, the adviser’s experience, and competence level as well as how their services will benefit you. If the adviser can’t explain their services in terms of how they benefit you, it probably isn’t a good fit.

An A-Z suite of products & services at your fingertips. Awesome! Safe, easy, and convenient, right? Not exactly. Big is not the same as safe and, in truth, could put your money at more risk. 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.

It’s important to understand the adviser’s experience level, operational safeguards, and regulatory history (refer to question #22). A high quality 3rd party custodian is a must. Many sole practitioners come from larger firms and grew tired of working under the confines of a corporate bureaucracy when they believe they could better service clients with more personalized attention. In contrast to large, integrated (and dual-registered) firms with proprietary products or affiliates, a true independent fiduciary is free to select the best product, help you coordinate information with your other advisers, or help you find the best service provider to meet your needs.