Vetting Your Financial Adviser: Finding Right-Fitting Advice

In my last blog, “Vetting Your Financial Adviser: First There is Fiduciary,” we offered some ideas on how to check out an adviser’s background, and why we would suggest that the first hurdle to overcome when selecting an adviser is to ensure his or her advice is of the highest, fiduciary standard. Today, we’ll wrap up our discussion about fiduciary duty and offer additional qualities worth seeking in your current or future adviser.  

Final Words on Finding the “Right” 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.

While fee-only advisers are always fiduciaries when they give advice on allocation and in selection of products, fee-based advisers are not.  Remember our “Lou the Butcher” example?  Fee-based advisers may actually act as a dietician, providing you advice in your best interest on allocation of assets. But like Jekyll and Hyde, they can switch their duty before your very eyes (and you never actually see this happening) and become Lou the Butcher. Their duty of care to you, when they select products to populate your portfolio, may then provide them additional compensation in the form of commission, based on the suitability standard.  We believe this is a conflict of advice!

So how do you know if your fiduciary adviser is always your fiduciary, providing advice that is always in your best interest? One way to determine whether your adviser will always 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 adviser? Take no less than an unqualified “Yes,” with no ifs, ands or buts. Some advisers are dually registered, which means some of their advice is dispensed with a broker/suitable hat on and other advice is delivered in a fiduciary role. If someone will not or cannot agree to always act in your best interest under all circumstances, how valuable is the advice?
  2. Will you agree to a fiduciary relationship in writing? How reliable are verbal assurances if an adviser won’t agree to the same in writing? For example, here is a simple but powerful fiduciary oath from fi360, an advocate for excellence among financial service providers. In our estimation, any adviser worth heeding should be happy to sign such an oath.

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Complementary Qualities for Your Adviser Relationship

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

Business Structure: The Registered Investment Adviser Firm

By law, independent Registered Investment Adviser 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 advisers 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 Adviser 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. (AMDG Financial is regulated by the SEC.)
  • 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 adviser, why complicate things with potentially dueling interests?

Compensation Arrangements: To Whom Is Your Adviser Beholden?

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

If your adviser 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 transparent, fee-only arrangement enables you to clearly see what you’re spending in exchange for what you’re receiving. Second, if your adviser’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 advisers are receiving your fees, plus commissions from others. If the adviser is entirely fee-only, except he or she can write insurance policies, such as an annuity, as needed to protect your primary investments (with full disclosure of all commissions being received for this singular activity) then a fee-based relationship may still complement your best interests. However, it would be in your best interests to get a second opinion from an adviser who would receive no compensation from the recommendation. If the fee-based adviser’s commissions are coming from investment activities, the same conflicts arise as those described above for a fully commissioned adviser.

One more note on annuities: As I mentioned, they are insurance products, and a fee-based adviser who is licensed as an insurance agent can make a significant commission by selling them. Annuities can be fixed, variable or indexed, and while legitimate reasons exist for their use, the sale of annuities remains a highly conflicted area of advice. A fee-only adviser may also recommend an annuity, but he or she would receive no compensation for the recommendation, which reduces the possibility of conflicted advice.

Investment Planning and Execution: How Stable Is the Strategy?

Bottom line, how is your adviser managing your money?

  • Does he or she use a robust process that includes investment planning and execution?
  • Does your adviser integrate your investment strategy with your tax and financial strategies?
  • 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 adviser’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 adviser’s fiduciary care of your interests, through the years and across various market conditions. 

At AMDG Financial, our process includes more than just investment advice. We integrate tax, financial and investment strategies to optimize every aspect of our clients’ portfolios. We believe investment advice is one part of a more holistic solution that helps to increase the odds of our clients achieving all that is important to them. You can read more about our process here.  

Custody Arrangements: Insist on Independence

Even if your adviser 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 Adviser: Coming Full Circle

We circle back to the question we posed at the outset of this series: In selecting or retaining a investment adviser, 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 adviser’s background and ensure that his or her advice will be of the highest, fiduciary standard. Take advantage of resources, such as the adviser’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 adviser 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 adviser 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 AMDG Financial. We are proud to be a fiduciary, fee-only, Registered Investment Adviser firm offering an evidence-based investment strategy guided by your highest financial interests. Together, let’s explore your own financial possibilities. Contact us to explore how we can help you achieve your financial goals.

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