Doing Due Diligence on Your Financial Advisor – Part III: Finding Right-Fitting Advice

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In the previous two Financial TIPs in our series, “Doing Due Diligence on Your Financial Advisor,” we offered some ideas on how to check out an advisor’s background, and why we would suggest that the first hurdle to overcome when selecting an advisor is to ensure his or her advice is of the highest, fiduciary standard. In this final installment, we’ll wrap up our discussion about fiduciary duty and offer additional qualities worth seeking in your current or future advisor.

 Final Words on Finding a Fiduciary

First, the difference between fiduciary vs. suitable advice bears repeating: Merely suitable advice does not have to be the best advice for you; it is assumed to contain conflicts of interest.

One way to determine whether your advisor will be acting as your fiduciary is to ask these two essential questions:

  1. Will your relationship with me be only and always as my fiduciary advisor? Take no less than an unqualified “Yes,” with no ifs, ands or buts. Some advisors are dually registered, which means some of their advice is dispensed with a broker/suitable hat on and other advice may be delivered in a fiduciary role. If someone will not or cannot agree to always act in your best interest under all circumstances, of what worth is the advice?
  2. Will you agree to a fiduciary relationship in writing? How reliable are verbal assurances if an advisor won’t agree to the same in writing? For example, as mentioned in the previous TIP, here is a simple but powerful fiduciary oath from fi360, an advocate for excellence among financial service providers. In our estimation, any advisor worth heeding should be happy to sign such an oath as Tobin Investment Planning LLC provides every client.

Complementary Qualities for Your Advisor Relationship

Beyond accepting a fiduciary duty, there are other ways that advisors can best position themselves to sit on the same side of the table as you and your financial interests.

Business Structure: The Registered Investment Advisor Firm

By law, independent Registered Investment Advisor firms must provide strictly fiduciary advice to their clients. In contrast, brokerages, banks, insurance agencies and other transactional businesses more typically offer suitable advice.

Regulatory Agent: Seek State or SEC Oversight

When a firm and its team of advisors are providing only suitable advice, they may not go out of their way to tell you so. A short-hand approach to sorting out the players is to determine which financial regulator oversees the firm by checking their fine print.

  • Registered Investment Advisor firms are regulated either by the U.S. Securities and Exchange Commission (SEC) or by their state, depending on firm size (as measured by assets under management). These firms have a fiduciary duty to their investor clients.
  • Brokerages and other transactional businesses are regulated by the Financial Industry Regulatory Agency (FINRA) and are more likely providing only suitable advice.
  • If you see references to both FINRA and the SEC in a firm’s disclosures, that’s the calling card of dual registration. When it’s easy enough to find a fully fiduciary advisor, why complicate things with potentially dueling interests?

 Compensation Arrangements: To Whom Is Your Advisor Beholden?

Speaking of potentially dueling interests, another way to determine how well your advisor’s interests are aligned with yours is by determining his or her sources of compensation.

If your advisor is receiving commissions from third-party sources, suffice it to say he or she is exposed to conflicting incentives to recommend particular products or transactions that may not be in your best interests. In addition, these conflicts and their resulting costs (which silently drag on your returns) often remain undisclosed to you.

A fee-based arrangement warrants further inspection when a fee-based advisor is receiving your fees, plus commissions from others. If the advisor can write insurance policies for you as needed (with full disclosure of all commissions being received for this singular activity), then a fee-based relationship may still complement your best interests. However, if the commissions are coming from investment activities, the same conflicts arise as those described above for a fully commissioned advisor.

A transparent, fee-only arrangement is preferred. First, you can clearly see what you’re spending in exchange for what you’re receiving. Second, if your advisor’s only compensation comes from you, it enhances his or her ability to offer the impartial, product-neutral advice you deserve.

Investment Planning and Execution: How Stable Is the Strategy?

Bottom line, how is your advisor managing your money?

  • Does he or she offer a written Investment Policy Statement that documents your personal financial goals and your strategies for achieving them?
  • Is your portfolio structured according to decades of robust evidence indicating how to capture long-term market growth in accordance with your risk tolerances?
  • Is the strategy implemented with efficient, low-cost solutions that make best use of this same evidence?
  • Are your assets being considered as an integrated whole, whether directly under your advisor’s management or held in outside accounts such as your company’s retirement plan?

A comprehensive investment approach that you can consistently apply to your total wealth is core to your advisor’s fiduciary care of your interests, through the years and across various market conditions.

Custody Arrangements: Insist on Independence

Even if your advisor checks out so far, there’s one more way to protect your interests. After all, Bernie Madoff looked fine on paper before he was exposed as a smooth-talking criminal. In protecting yourself against scoundrels in disguise, it’s essential to ensure that your money is held in your name at a fully independent custodian that reports directly to you.

Ensuring your money is held at a separate custodian affords you the opportunity to review separate financial statements for any discrepancies. (Madoff maintained custody of his clients’ accounts at his New York brokerage house, enabling him to falsify their reports.) It also lets you log into your account anytime to keep an ongoing, “trust, but verify” eye on your assets.

Finding Your Right-Fitting Advisor: Coming Full Circle

We circle back to the question we posed at the outset of this Financial TIPs series: In selecting or retaining a financial advisor, how do you know if you’re making a wise choice?

We hope you’re convinced by now that the first order of business is to review an advisor’s background and ensure that his or her advice will be of the highest, fiduciary standard. Take advantage of resources such as the advisor’s Form ADV and other legally required disclosure statements that enable more apples-to-apples comparisons. Look for the additional characteristics described above, that best position an advisor to sit on your side of the table.

After that, look for someone you get along with on a personal level. If you and your advisor don’t “click,” even good advice will be hard to take, as described by author Seth Godin:

“Good advice … is priceless. Not what you want to hear, but what you need to hear. Not imaginary, but practical. Not based on fear, but on possibility. Not designed to make you feel better, designed to make you better. Seek it out and embrace the true friends that care enough to risk sharing it. I’m not sure what takes more guts—giving it or getting it.”

Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author on the date of publication and are subject to change. Content should not be viewed as personalized investment advice or as an offer to buy or sell the securities mentioned. A professional advisor should be consulted before implementing any of the strategies presented.
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Tobin Investment Planning LLC is registered as an investment advisor and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment advisor does not constitute an endorsement of the firm by securities regulators nor does it indicate that the adviser has attained a particular level of skill or ability. The firm is not engaged in the practice of law or accounting.
All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. There are no assurances that a portfolio will match or outperform any particular benchmark. Past performance is not an indicator of future results.

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