Does Your "Advisor" Work For You?: Questions You Can Ask to Find Out
Recently, I was flying back from a trip to St. Louis. Seated on my right was a young lady flipping through a variety of investment reports. It was clear that she worked in “my world.” On my left – yes, I had that lovely Southwest middle seat – was an older gentleman who I later learned was a technology entrepreneur. As we settled in, the gentleman asked about her tote bag, which was curiously covered with about twenty-five different patches portraying vacation destinations around the world. She went on to explain that she worked for a financial advisory firm and that each patch represented a trip she had won for achieving top sales awards. I could not help but wonder if her clients knew that the investments she recommends may not be in their best interests but in the interest of winning vacations.
In 1940, Fred Schwed Jr. wrote a classic critique of Wall Street entitled Where are the Customer’s Yachts? Or A Good Hard Look at Wall Street. He tells the story of a visitor to New York who admires the yachts of the bankers and brokers and then asks where the customers’ yachts are. His point – which has been repeated by others over the last 75 years – is this: there is often far more money in giving financial advice than in getting financial advice.
As an example, on August 2, 2018, The St. Louis Business Journal listed St. Louis’ Top 100 highest-paid executives ranked by 2017 total compensation. I was shocked when I saw that the top 5 all worked for an investment advisory firm, and each made over $10 million!
Today, there is much legal and political debate around the concept of being a fiduciary. A fiduciary is someone who has a legal obligation to put clients’ interests first. As the Department of Labor and the SEC continue to seek clarification and improve accountability, most big banks, brokerage firms, and insurance companies – all who make significant profits off the selling of investment-related products – press against this standard and the PAC money flows.
Questions to Ask Your Advisor
Most people assume their investment “advisor” is obligated to put their interests first. Unfortunately, this is often not the case. And yet, isn’t this what you want? If so, read on. Here are some questions to consider to get more assurance that your advisor is working for you:
Are they a full-time “fiduciary?”
Not everyone is. Many “advisors” are actually brokers or agents who only need to think an investment is suitable for you – a much lower standard than what is in your best interests. They are generally compensated by commissions and sales incentives to recommend products. Imagine you were ill and needed a prescription. Do you want medicine the doctor is incented to prescribe or the medicine that is best for you? Surely, you want what is in your best interests! Find out if they are fiduciaries all the time. This sounds strange, but some advisors are dual-licensed as brokers. That means sometimes they work for you, and sometimes they may not. Good luck trying to keep track of that!
Do they have conflicts of interest?
Remember, you want them working for you! A fiduciary can generally remain a fiduciary provided they properly disclose their conflicts to you. Conflicts should be red flags that need to be investigated. They are often hard to find as they are written in fine print or embedded deep within a 60+ page document. Conflicts show up in a variety of ways – not all are bad – but you should be aware of them. Here are some common conflicts to watch for:
Do they use proprietary products such as their own mutual funds/ETFs or in-house wrap programs? Or, are they “open architecture” seeking out the best solutions for you? From our experience, most proprietary products cost more than comparable investments you can get elsewhere.
Do they receive fees/commissions to sell products? These can be commissions, agency fees, 12b-1 fees, soft dollar research, and such. While not necessarily wrong, you should get that information, so you can better assess if the investment recommendations are in your best interests and not the ones that create the biggest payday for your advisor.
Are they independently owned by the employees, or owned by a firm that may not be aligned with your best interests? This can really drive culture, particularly if there is a sales focus. Just Google the ongoing mess at Wells Fargo! You probably want someone who puts you first, not their own financial backers.
Are they “registered,” and do they have a clean record?
This is probably the most overlooked consideration. FINRA provides an online tool for reviewing the standing of brokers/advisors with the regulatory and legal bodies. It’s easy. Go to https://brokercheck.finra.org/ and search for the firm or advisor. If there are issues (complaints, settlements, legal action) you should find these here. If they are not registered, that could be a problem too.
Do they have advanced credentials?
These often indicate a passion and capability for learning (are they smart?), and a deeper commitment to compliance and ethics (can you trust them?). Common and reputable designations include: CFP®, CFA®, CPWA®, CPA, ChFC®, or AIF®.
Will they be transparent?
Your advisor should be willing to disclose all the fees he/she and their firm make off you, and you should get this in writing to keep them honest. Additionally, investment results should be benchmarked against real and appropriate indices, so you can see how they are really doing.
Don’t Be Reluctant to Ask the Hard Questions
When it comes to big purchases, most people dive into research to help make a wise decision. For homes, we access sources like Zillow, Trulia, or MLS to get “comps.” We may even drive the neighborhood looking at schools, neighbors, and traffic flows. Yet, when it comes to who manages our investments and financial affairs – where the bulk of your net worth typically is – clients seem a bit reluctant to ask the hard questions, or just don’t know what to ask.
This is your money, and if you are like most people, you want your best interests to be put first. Hopefully, these questions will help you be more equipped to determine if your advisor is working for you or just collecting another destination patch.
