How to a Fiduciary Financial Advisor
How do I find a Fiduciary Financial Advisor?
This is a challenging question, and it’s time to address a challenging subject: How do you know if you’re making a wise choice when selecting or retaining a financial advisor?
It’s a challenging subject for us, and one that we take very seriously as we develop and expand on our firm’s best practices. We believe it is even more challenging for investors. First, the stakes are high. The quality of the selection, or lack thereof, can make or break your family’s financial future. Second, the choices are bewildering in number and complexity. With the glut of confusing jargon and conflicting views clamoring for your consideration, it’s hard to know who to trust when making important financial decisions.
A Wise Source to find the Best Financial Advisor for you
An excellent place to start is with the author, commentator, and Wall Street Journal finance columnist Jason Zweig. Like us, he is a strong proponent of investing guided by rational evidence over reactionary emotions. We respect Zweig for telling it like it is, with his mission (and ours) to serve as a “Safe haven for intelligent investors.”
What does Zweig have to say about the challenge of selecting a Financial Advisor relationship that is right for you? In “Full Disclosure: Is Your Advisor Hiding Something,” he observed: “So how can you make sure you know everything you need to know about a financial adviser before you hire him? You can’t. While most advisers are undoubtedly honest, the few who aren’t can always find clever ways to hide another skeleton in an already bulging closet.”
And there’s the crux of the challenge. We know that we are fully committed in principle and practice to serving your highest financial interests, even ahead of our own. But how in the world do we prove it? And how do you, the investor, believe it?
Zweig’s objective column offers helpful tips on the due diligence you can and should do when considering a new personal financial advisor relationship or reviewing an existing one for your financial needs. He advises you to:
- Google It – Use your favorite search engine to periodically check what the virtual world says about your advisor or would-be advisor. Search on both the individual and firm names. Ensure you’ve got the right person or advisory firms in your hits, especially if the name is relatively common. And remember that some resources will be of higher quality than others.
- Check the Reports (Form ADV) – Advisors in the U.S. are required to disclose several essential details worth knowing about themselves. Whether registered with their state or the Securities Exchange Commission (SEC), Registered Investment Advisor firms must file a Form ADV. The Form ADV is typically available on the SEC’s Investment Adviser Public Disclosure website. ADV “Part 2 Brochures” are meant to serve as the closer-to-plain-English version of the adviser’s full report, so you may want to start there. (Here’s a link to our Form ADV Part 2 Brochure.)
- Just Ask – Any reputable Financial Advisor should relish your candid inquiries, no matter how detailed, direct, or seemingly delicate they may be. If the response underwhelms – if it’s incomplete, confusing, defensive, or otherwise lacking – this may indicate an ill-fitting relationship, even if everything else checks out fine. Remember, it’s not only what an advisor knows but how comfortable you will be working with the individual and his or her team over the long haul. If responses to your important questions feel stilted or incomplete, it’s unlikely you’ll end up living happily ever after in the relationship.
If you’re unsure what to ask, here are Ten Questions to Ask Your Financial Advisor from the CFP® board.
Doing Your Due Diligence
In conducting your due diligence described above, the next logical question is: What should you look for in an advisor? What qualities should anyone seeking to advise you about your wealth be able to show and tell? What warning flags warrant either closer inspection or immediate rejection? It’s important to consider your specific needs when evaluating potential financial advisors. Ask about their financial planning approach and ensure their services align with your specific needs. Additionally, inquire about their experience working with clients similar to you to ensure they have the expertise to meet your specific needs.
In the medical profession, physicians practice according to a common standard: “First, do no harm.” There should be a similar level of commitment for anyone who wants to advise you about your financial well-being. Unfortunately, there isn’t. Financial advice is subject to a double legal standard: “fiduciary” versus “suitable” advice. Worse, it’s up to you to spot the differences between them and to heed the quality of the advice accordingly.
Fiduciary vs. Suitable: Different Incentives Drive Different Advice
Let’s begin with an analogy. This classic HighTower animated video compares fiduciary versus suitable advice to similar differences between a registered dietitian versus “Lou the Butcher.”
Lou can offer suitable information about quality cuts and prices as you purchase his wares. Still, you wouldn’t ask a meat vendor whether he’d recommend steak or eggplant. Because of his business interests, you already know what his answer will be. A dietitian, in contrast, is paid to advise you on your overall diet according to your personal health goals. His or her livelihood depends on improving your well-being rather than promoting one product over another.
Similar differences exist between a suitable broker versus a fiduciary advisor. Both may recommend investments, but underlying interests could influence a broker’s suitable advice in promoting one product over another. Fiduciary advice, in contrast, must be based exclusively on advancing your highest financial interests.
Fiduciary vs. Suitable: What’s the Difference?
Why the different legal standards? Government regulators assume that a broker’s primary role is to place trades, so any advice he or she offers is considered secondary to this primary, transactional business. A broker’s advice must be suitable for you, but it does not have to be best for you.
Also, a broker does not have to reveal if a conflicting incentive is driving the recommendation. In his Washington Post column, “Find a financial advisor who will put your interests first,” Barry Ritholtz describes suitable advice bluntly: “The suitability standard is far more complicated – and offers much less protection to investors. The simplest way to describe this standard is ‘Don’t sell AliBaba IPO to Grandma.’”
Let’s provide an example of how suitable and fiduciary advice can differ from one another. Imagine you are comparing two mutual funds for your investment portfolio that are equally appropriate for your portfolio, except one entails higher fees and pays higher commissions to the trader. Brokers offering suitable advice can freely recommend funds that compensate them more handsomely at your expense without disclosing this fact to you.
On the other hand, if all else is equal between two investment selections, a fiduciary financial advisor must recommend the lower-cost investment that represents your best interest.
Suitable Illustrations in Action (or Inaction)
You may wonder whether suitable conflicts of interest matter. If you’re working with a financial pro and your investments seem to be doing okay, is there any harm done if the broker receives a few extra dollars along the way?
We believe the investment damage done can be considerably more significant than most people realize. Take this illustration of a couple in their 70s, the Toffels, featured in a New York Times exposé, “Before the Advice, Check Out the Adviser.”
The Toffels were not sold an AliBaba IPO for their $650,000 life savings, but their broker did saddle them with a variable annuity that cost more than 4 percent annually. “That’s more than $26,000 annually – enough to buy a new Honda sedan every year,” observed the columnist. The annuity also included a 7 percent surrender charge, effectively trapping the Toffels into the overpriced holding. Consider this in the context of a typical, no-frills index fund costing less than 0.25 percent, with no surrender charge.
The article points out: “Like many consumers, [the Toffels] say they didn’t realize that their broker wasn’t required to follow the most stringent requirement for financial professionals, known as the fiduciary standard.”
Not yet convinced? In February 2015, the White House weighed in on the subject with its report “The Effects of Conflicted Investment Advice on Retirement Savings.” Citing evidence from more than 50 independent resources, including dozens of peer-reviewed academic studies, the report estimated that retirement investors might be losing an aggregate of $8–$17 billion each year from conflicted advice. “Conflicted payments are payments to the adviser that depend on actions taken by the advisee,” explains the report, and lists an abundance of such practices, including revenue-sharing, 12b-1 sales fees, front-end and back-end sales loads, commissions on products sold, and additional incentives for recommending one product over another. And, of course, such typical cost leaks are by no means limited to retirement savings.
Combine the White House report with The New York Times piece (and many other examples we could cite), and the illustrations draw a clear conclusion: Suitable “advice” costs plenty of families plenty of wealth that would otherwise be theirs to keep. That is why it behooves you to turn to a fiduciary investment advisor whose legal duty is to always advise you strictly according to your highest financial interests, ahead of any such conflicts of interest.
Fiduciary vs. Suitable: How Do You Know?
We believe investors deserve better than advice that is merely suitable for their life’s savings. That’s why we have established RCS Financial Planning as a fee-only Registered Investment Advisor firm, which commits us to always and exclusively be fiduciary financial advisors to our clients. By law and design, we place our client’s financial well-being at the very top of our decision-making tree, even ahead of our business interests.
Unfortunately, unlike in the food industry, where it’s easy to differentiate a vendor from a healthcare professional, it’s often unclear in the financial world who you’re dealing with, where their interests lie, and what kind of advice you’re receiving for your financial situation.
How To Find a Fiduciary Financial Advisor
First, the difference between fiduciary vs. suitable advice bears repeating: Merely suitable advice does not have to be the best advice for you; we assume suitable advice contains conflicts of interest.
One way to determine whether your advisor will be acting as your fiduciary is to ask these two essential questions:
- Will your relationship with me be only and always as my fiduciary advisor? Take no less than an unqualified “Yes.” Some advisors are dually registered, which means they give some of their advice with a broker/suitable hat on and deliver other advice 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?
- 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, here is a simple but powerful fiduciary oath.
When evaluating a financial advisor’s website, pay close attention to phrases like “securities offered through” or any references to a broker-dealer or insurance products. These terms indicate that the advisor can sell financial products for a commission, which can present a conflict of interest. It’s essential to understand that advisors who earn commissions may have incentives that don’t always align with your best financial interests. Instead, consider seeking a fee-only fiduciary advisor who prioritizes your needs above all else.
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 determining which financial regulator oversees the firm by checking their fine print.
- Registered Investment Advisor firms are regulated by the U.S. Securities and Exchange Commission (SEC) or their state, depending on firm size (as measured by assets under management). These firms have a fiduciary duty to their investor clients.
- The Financial Industry Regulatory Agency (FINRA) regulates brokerages and other transactional businesses, and they are more likely to provide only suitable advice.
- If a firm’s disclosures refer to both FINRA and the SEC, that’s the calling card of dual registration. When it’s easy enough to find an entirely 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 if your advisor’s interests align with yours is to identify his or her sources of compensation.
If your advisor receives commissions from third-party sources for selling financial products, suffice it to say he or she has conflicting incentives to recommend particular products or transactions that may not be in your best interests. Also, these conflicts and their resulting costs (which silently drag on your returns) often remain undisclosed to you.
A transparent, fee-only arrangement is preferred. First, you can 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.
A fee-based arrangement warrants further inspection. Fee-based advisors receive your fees plus commissions from others. If the commissions are coming from investment activities, the same conflicts arise as those described above for a fully commissioned advisor.
Investment Planning and Execution: How Stable Is the Strategy?
The bottom line is, how is your advisor managing your money?
- Does he or she offer a written Investment Policy Statement and financial plan 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 per your risk tolerances?
- Is the plan implemented with efficient, low-cost solutions that make the 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 allows you 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 the Best Financial Advisor for You: Coming Full Circle
We circle back to the question we posed at the outset of this series: In selecting or retaining a financial advisor, how do you know if you’re making a wise choice?
Your 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 and watch out for any red flags, such as disciplinary actions, on FINRA’s BrokerCheck website.
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.”
To begin your due diligence, we invite you to access our Form ADV and learn more about RCS Financial Planning. We are proud to be a fiduciary, fee-only, Registered Investment Advisor firm offering an evidence-based investment strategy guided by your highest financial interests. Together, let’s explore your financial possibilities.