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Financial advice is one of the most mystifying services consumers purchase. In a field which has evolved to become as complex as medicine, it remains very difficult to tell the difference between highly trained, ethical and effective advisors, and charming salespeople who may or may not be able to effectively grow and protect your family’s wealth. Hopefully, this whitepaper will help to clear the mystery and share some easy guidelines to ease your decision, and help determine which advisor can best suit your needs, and whether your existing advisor makes the grade, or if you should consider replacing them. We believe there are eight critical factors, which we call the 8 Keys to a Great Advisor. They are:
- Do they put you – or themselves – first?
- How expert? Are they highly trained and educated in wealth planning?
- Are they tax savvy to conserve your wealth?
- Is compensation clear and fair?
- Getting advice & planning or just products?
- How severe and obvious are conflicts of interest?
- Is there regulatory disciplinary history?
- Any third party recognition of excellence?
All can be critical to getting excellent advice. The Big Mistakes, of course, are using an advisor who is deficient in one or more of them, since the absence of even one of these factors can lead to financial underperformance or even disaster.
Before we get into each of the 8, it is important to mention that the term advisor – which used to have a stricter meaning and was reserved for professionals who had a legal duty to put clients’ interests first – has been transformed into more of a marketing term, now applied to what we used to call stockbrokers, insurance salespeople, and others in sometimes misleading ways, even using commercials which seem to imply they must put your interests first, but actually say no such thing.
Avoid Mistake #1 – Make sure they’re a fiduciary
Fiduciaries are legally required to put your interests ahead of their own, and to have a sound basis for all of the advice they give you. “Suitability” standard advisors – and this includes the vast majority of stockbrokers, bank reps, insurance agents, financial planners, and others who use the term advisor – typically do not! Most people don’t know the difference, and most “advisors” are happy to let investors think their interests are first when really they are not. This situation has gotten so abusive that the Department of Labor – in pretty controversial move – has mandated a weak fiduciary standard that applies to all advisors – but only for retirement accounts like IRA’s – meaning the same old game for joint and regular “non-qualified” accounts. For so long as this rule sticks (and attacks are mounting in Congress and the courts), it should add to the confusion, and possibly promote even more abuse. So don’t make the mistake! Make sure the advisor is acting in a fiduciary capacity on all investment advice they give you – and get it in writing!
Here’s a Fiduciary Oath you can ask paste into an email and ask the advisor to sign. If they won’t sign something like this, do not use them! And make sure you tell them you need to email a signed copy to their compliance department, just to make sure you have something to rely on if they mislead you.
PUTTING YOUR INTERESTS FIRST
I believe in placing your best interests first. Therefore, I am proud to commit to the following five fiduciary principles:
- I will always put your best interests first.
- I will act with prudence; that is, with the skill, care, diligence, and good judgment of a professional.
- I will not mislead you, and I will provide conspicuous, full and fair disclosure of all important facts.
- I will avoid conflicts of interest.
- I will fully disclose and fairly manage, in your favor, any unavoidable conflicts.
Advisor ____________________________
Firm Affiliation ____________________________
Date ____________________________
Created by the Committee for the Fiduciary Standard
http://www.fi360.com/main/pdf/fiduciaryoath_individual.pdf
Avoid Mistake #2 – Don’t deal with the poorly trained!
Perhaps surprisingly, it is very quick and easy to become a financial “advisor.’ The government licenses required can be obtained quite rapidly, with very little depth of study or knowledge required. Regulatory agencies – the States and the Federal government for securities (stocks, mutual funds, etc), and the States alone for insurance (including life insurance products and annuities) – require only fairly simple sales licensing exams which can typically be passed by a person of average intelligence with just a few weeks’ preparation. For instance, I was able to pass the Series 7 “full service stockbroker” exam – much more complicated than the Series 6 license common with many advisors today – the first time, cold, with only a week’s worth of study, and no background in finance (in fact I had a recent degree in chemistry). The Florida life insurance license required two weekends of classes. This kind of license does not connote much knowledge or expertise, but merely the legal permission to sell products, usually on commission.
To my mind, the first basic step on the long road to financial expertise is the Certified Financial Planner™ (CFP®) or the Chartered Financial Consultant® (ChFC®). This is not the be-all, end-all, but the very first exposure to fundamentals – financial planning procedure, investments, income tax, retirement planning, estate planning, and insurance/risk management – which must be refined and internalized with later, more advanced study. Some (including myself) feel that the ChFC® “is better viewed as a good “post-CFP” educational program in financial planning to take after completing the CFP program itself. The ChFC includes a wide range of electives that advisors can select…” (Kitces; https://www.kitces.com/blog/what-comes-after-cfp-certification-finding-your-niche-or-specialization-with-post-cfp-designations/). These basic “letters” are bachelors of sorts for the business, though it is interesting to note that neither requires a degree – or even any college credit – in financial planning studies. As of January 2015 web search, there were 629,500 people with securities sales licenses in the US (http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/P015174) and only some 71,400 CFP®’s (http://www.cfp.net/news-events/research-facts-figures/cfp-professional-demographics), or about 11% of securities licensees having the CFP® basic credential, when one considers the number of insurance agents offering financial planning who do not also have a securities license, the percentage drops still lower.
After the basic credential, truly expert knowledge can by gained via specialized, and more advanced designation programs.
For tax, the CPA, E.A. (an IRS credential requiring three advanced tax exams) and some masters in taxation (such as the MTAX) hone this area; but note that only attorneys, CPA’s and E.A.’s may represent taxpayers before IRS.
For insurance – primarily life and health (which includes annuities, disability and long term care insurance) – the CLU® (Chartered Life Underwriter®) is the “gold standard in education for life insurance professionals… for those looking to really get a deeper base of knowledge in life insurance and its proper applications from a credible educational program… there really is nothing better than the CLU” (Kitces; ibid).
The bottom line is you want someone who is very extensively trained in multiple areas to help coordinate the extremely complex decisions you face to make the best financial moves. The FINRA licenses like Series 6, 7, and 65/66 teach very little. The CFP® or ChFC® is a start. The CFA® is very good for investments and nearly academic-grade. And there are beginning to be enough folks with Masters and even Doctorates in Financial Planning that you should consider seeking them out.
Avoid Mistake #3 – Make sure they’re tax savvy!
Feel like your wealth’s being taxed to death? Feel like you’re making plenty but not keeping enough? For many people, taxes are the single biggest obstacle to building wealth faster, which stands to reason since a huge percentage of annual income, that could be saved and invested, often evaporates to taxes instead. Unlike much else in life, with taxes it’s not who you know, but what you know! And there’s a lot to know – so much that various studies conclude that even IRS employees only understand between 55% and 83% of basic tax facts. As of 2006, the Federal tax rules totaled over 13,000 pages – and the rules have grown more complex since. Many of these rules exist to try to counter the tax reduction strategies that the most proactive taxpayers – and their advisors – keep coming up with to legally keep wealth in their families’ pockets, instead of the IRS’s. But for IRS it can be a game of catch up, with the best advisors finding new opportunities faster than IRS can close old ones. Great complexity can breed great opportunity, and “sophisticated taxpayers take advantage of the complexity to find loopholes that lower their tax liability.”*
Unfortunately, many financial advisors do not understand taxes – or even care to – well enough to find the ideas that can help capture some of the huge drain on your family’s wealth potential. This is unfortunate, since tax avoidance is perfectly legal, and often remarkably easy, if you have studied enough to know where to look. The opportunities to legitimately save enormous dollars can be profound, if you know what you are doing and where to look. Unfortunately, financial advisors and tax preparation professionals may not be the right place. According to a Money magazine study cited in the MIT book, not one tax prep professional was able to produce a correct return! Often, even the most basic tactics, like controlling taxable investment income, or maximizing tax deductions, are completely missed.
No matter how good they may be in other areas, if your financial advisor is ignorant of the best ideas to keep more of your wealth in your pocket, they are making you miss the boat.
*Joel Slemrod, Harvard PhD and Economics Professor University of Michigan (UM), and Jon Bakija UM PhD and Economics Professor Williams College, from the book Taxing Ourselves, MIT Press
Avoid Mistake #4 – Be crystal clear on what you pay!
Sadly, most investors don’t know how they pay their advisors, and many can even make it look like they work for free. Even when clients know they must be paying something, the human mind will discount what is not obvious, and let itself believe things are better or cheaper than they are. Make no mistake, however: financial advisors usually make a lot of money. Even when you see a “reasonable” fee of 1% or less, there can be much higher additional costs that are hard to spot and rarely talked about by advisors. Some common products may charge as much as 5% a year or more in fees that are nearly completely hidden, but perform no better than index funds costing less than 0.2% a year. This is important! The difference in wealth after 20 years with an average return of 7% starting with $500,000 is over one million dollars! (end value of $1,864,000 vs $743,000.)
Also sadly, disclosure – getting stacks and stacks of small print so intimidating that few people read it – often satisfies the legal requirements for a buyer beware marketplace, but leaves consumers almost completely uninformed.
I am regularly astonished by how little people seem to understand about the true costs they pay in brokerage accounts and insurance products. They don’t read the fine print, and rely on some advisor’s assurances that it is very inexpensive or even free – and in most cases, the advisor themselves probably does not know or understand the various ways the client is paying.
Getting the full picture can be very difficult, and most investors don’t have the time or resources to do the research. To protect yourself, demand a statement in writing of the various fees, costs, commissions, markups/markdowns, charges, insurance assessments, and other items that may be dragging your wealth down. Don’t accept a box full of disclosure documents – demand a simple one-page explanation of everything you pay, and be very suspicious of those who give you excuses instead of real information.
If you want to check up on this, request our free Portfolio Stress Test (call 800-262-1082), and we will do the work for you. More on this free service at the end of the report.
Avoid Mistake #5 – Buying financial planning, getting sold products
It seems as never before, consumers are concerned about future financial security, confuse by the complexity, and interested in financial advice and planning. At the same time, the financial/investments industry is still dominated by investment and insurance products profits. Advisors and their firms know this, and will typically pitch planning as a way to sell products, sometimes even generating elaborate, colorful financial plans and other (often boilerplate) documents. Unfortunately in far too many cases such plans and planning are cunningly designed sales pitches, intended to promote an understated (or even hidden) product sales agenda.
In many cases, this can be worse than no planning at all, since:
- The plan recommendations may be for high-compensation products the planner wants to sell, and not the best vehicles to target the consumer’s actual financial goals (remember non-fiduciaries are allowed to look out for themselves, not you, first!).
- If a “plan” is really a sales proposal (and I caution you that far, far too many are – and this can be hard to tell!) it is very unlikely that the advisor will monitor and manage it for you. Once the commission is paid, the plan is likely to be forgotten, or only paid lip service without real updates and analysis. I see this all the time, but am still astonished by consumers who believe that “oh, Mr. Advisor is managing that for us” when it is clear that a) they are not licensed to do so – the legal authority for management rest with the client, not the advisor!, and b) there may have been no changes in 10 years or more, or, worse, commission-driven changes that do not relate to the plan at all.
Once again, I stress that telling this can be very tough. It almost seems that the financial industry has carefully cultivated an illusion of service and clients-first duty which does not exist, in order to lull consumers into beliefs and decisions that profit Big Financial instead of the consumers.
The best way to ferret this out is to carefully go through the suggestions in the first 5 Mistakes, and do your homework to find out what is really going on. If you take us up on the free Portfolio Stress Test, we will do most of this for you, at no charge (we often get new clients by performing these tests, so we are happy to help even those that don’t want to switch).
As above, your best defense is to get it in writing. Get a signed document of exactly what planning services will be performed, and when, and what you will pay. A good time to do this would be when you get the compensation declaration we talked about in Mistake #4.
Avoid Mistake #6 – Avoid fatal conflicts of interest!
Conflicts of interest are inevitable. Couples have them. l We even have them in our own heads all the time (ice cream? or exercise?)! The key is to try to minimize them so your interests and those of your advisor are reasonably aligned. A good start is to insist on someone who pledges to act as a fiduciary for you – and make sure that what you hire them to do is what you actually need to advance your financial goals!
What I call fatal conflicts occur when:
- The advisor does not have an obligation to put you first, and can legally make as much money on you – at your expense – as they can by convincing you to buy products you are allowed to believe are best for you.
- The advisor actually pushes the most profitable products on you to maximize their compensation, often at the request or demand of their employer (which, by the way, is who the owe a fiduciary duty to, not you).
Avoid Mistake #7– Not checking up on the advisor!
We all like to work with people we like and trust. But the untrained look just as nice in a suit as those who have studied for years, and Bernie Madoff was no doubt very charming.
You need to run a background check. Fortunately, this is pretty easy since FINRA maintains a site called broker check (http://brokercheck.finra.org/), and because most (though not all) financial advisors are registered with FINRA, if they are not licensed by FINRA they are probably not licensed to sell or advise on securities, and that itself can be a red flag.
Not all disclosures are causes for concern. For instance, I have one on mine (from around 1989) showing registration in Michigan was administratively revoked for failure to pay some $15.00 to “renew” a state registration I had never applied for. Others – like the one below I pulled for an investor who asked for a portfolio stress test – are more troubling. This was for the investor’s advisor at the time of the stress test:
| activities occurred which led to the complaint: | |
| Allegations: |
ACCOUNT RELATED-NEGLIGENCE; MISREPRESENTATION;BRCH OF FIDUCIARY DT; MISREPRESENTATION
|
| Product Type: | |
| Alleged Damages: | $265,159.00 |
| Arbitration Information: |
This is regarding a client complaint for negligence, misrepresentation, breach of fiduciary duty, and a claim for the return of over a quarter million dollars lost as a result of the broker’s transgressions. This particular broker had several similar other disclosures, but remains employed by a major stockbrokerage whose name you would recognize. In fact, a recent academic study found that such misconduct is widespread. From http://advisorhub.com/wells-ubs-opco-named-in-scathing-report-on-broker-misconduct/: More than one in ten stockbrokers have a disciplinary mark on their public records, and several prominent broker-dealers including UBS Financial Services and Wells Fargo Advisors’ Financial Network (FiNet) appear to “specialize in misconduct,” according to a new study from business professors at the University of Minnesota and University of Chicago. “It’s the first large-scale study that provides evidence documenting the extent of misconduct of financial advisors and advisory firms,” said Mark Egan, a University of Minnesota professor who was one of three principal authors of the report. The high rate of disciplinary actions in the industry and the fact that 44% of financial advisors who are fired for misconduct find new jobs in the industry within a year could further fuel political and public reaction against the integrity of the securities industry. But it also draws some disturbing lines of differentiation among firms.
“Why are some firms willing to hire advisors who were fired following misconduct?” the study asks. “If firms had identical tolerance toward misconduct, such rehiring would not take place.”
It is also important to note that FINRA – the Financial Industry Regulatory Association – is essentially a trade association owned by the brokerage houses itself, and ultimately beholden to them. It is also not unusual to see misconduct expunged from a broker’s record, giving the appearance that all is well.
Brokercheck is not without its limitations, but is still a useful tool you should use.
The National Ethics Association is sort of a Better Business Bureau for financial professionals, and you can check advisors out at ethics.net. Other sources like the Paladin Registry rate advisors on a variety of important measures.
Avoid Mistake #8– Are there 3rd party indications of quality?
Testimonials – client’s comments on satisfaction, etc. – are illegal for investment advisors since 1940 (but legal for suitability investment salespeople – go figure!) so you don’t, or should not anyway, see them much. If you do (like on LinkedIn), this can be a big red flag and you should ask carefully if it is subject to the SEC prohibition on testimonials – if they don’t know what you mean, that’s a concern.
Sometimes advisors will make client references available which can be useful, but this can be rare.
Which means that in many cases, any outside evaluations of advisors may be all you have to go on. As mentioned in the intro, either me or my firm has been recognized by Barrons, WORTH, and a number of other authorities, but it should be noted that even these are generally based on information largely provided by the advisor themselves, with sometimes some additional spot checking by the authority in question. It is also worth noting that by definition, only a very small percentage of advisors are distinguished enough to make the “top” lists from respected sources. It is also important to note, however, that many advisors who “fail” many of the Mistakes in this report can still make the lists, since they can use different criteria than I suggest you use. So in the end, third party recognition is just one more thing to factor into your opinion – in addition to all the others discussed here.
Here’s more about the free Portfolio Stress Test you can obtain by calling us at 800-262-1083. After that are some tools you may use to try to evaluate your existing advisor or a new one you are considering. Part of our Portfolio Stress Test involves helping you to assess your advisor. If you choose to do this yourself, may I suggest that you re-read this report several times and do some outside research to be sure to be well-grounded in the material before expecting to draw reliable conclusions and action plans on your own. You should feel confident that you are well steeped in the concepts, can apply them effectively, and have found the many tools you’ll need. In writing this report, I’ve tried to simplify the process for you, but you’ll still need to understand what needs to be done, where to find the data you’ll need, and then actually remember to make yourself do it thoroughly and on an ongoing basis. And remember, getting the feedback of even the most well-intentioned of your existing advisors may draw you into a “leave well enough alone” myopia that may salve all egos but leave your cupboards barer than they might otherwise be—especially if they make a lot of money on your relationship and perhaps would prefer you not dig too deep. Even if they don’t have things they’d rather you’d not know, and even if they might be tempted to spin answers in fear of losing your business.
Advisor Scoring Checklist
Credentials
General Financial Planning
- CFP®
- ChFC®
- PFS®
Advanced Financial Planning
- CPWA®
- MSFS® (or other Master’s Degrees in Financial Planning)
Life Insurance
- CLU®
Estate Planning
- AEP
- MSFS®
Investments
- CFA®
- CIMA®
- CMT™
Tax
- E.A.
- CPA
- MTAX (Master’s in taxation)
CFP® Certified Financial Planner®:
“A CFP® professional is an individual who has a demonstrated level of financial planning technical knowledge, experience in the field and holds to a client-centered code of ethics. CFP® practitioners develop theoretical and practical financial planning knowledge by completing a comprehensive course of study at a college or university offering a financial planning curriculum registered with the Certified Financial Planner Board of Standards. CFP® practitioners must pass a comprehensive two-day, 10-hour CFP® Certification Examination that tests their ability to apply their financial planning knowledge in an integrated format. Based on regularly updated research of what planners do, the CFP® Board’s exam covers the general principles of financial planning, insurance planning and risk management, employee benefits planning, investment planning, income tax planning, retirement planning and estate planning. CFP® practitioners must have a minimum of three years’ experience working in the financial planning process prior to earning the CFP® mark. As a result, CFP® practitioners have demonstrated a working knowledge of counseling skills in addition to their financial planning knowledge. CFP® practitioners must pass an ethics review and agree to abide by the CFP® Board’s Financial Planning Practice Standards and a strict code of professional conduct, known as the CFP® Board’s Code of Ethics and Professional Responsibility. The Code of Ethics states that CFP® practitioners are to act with integrity, offering professional services that are objective and based on client needs.” – FPA/Financial Planning Association
ChFC® Chartered Financial Consultant®:
“The Chartered Financial Consultant® (ChFC®) credential was introduced in 1982 as an alternative to the CFP® mark. This designation has the same core curriculum as the CFP® designation, plus two or three additional elective courses that focus on various areas of personal financial planning. The biggest difference is that it does not require candidates to pass a comprehensive board exam, as with the CFP®. The CFP® designation requires less coursework but forces its students to learn the material in a way that allows them to proactively apply it in the board exam. The CLU® and ChFC® credentials require more coursework but have no comprehensive exam” – investopedia.com
CFA®: Chartered Financial Analyst®:
“The CFA® designation is regarded by most to be the key certification for investment professionals, especially in the areas of research and portfolio management. The CFA® designation is given to investment professionals who have successfully completed the requirements set by the globally recognized CFA® Institute (formerly the Association for Investment Management & Research, or AIMR). To be eligible for the CFA® designation, candidates must attain the following: 1) Have at least three years of professional investment experience; 2) Pass three rigorous six-hour exams over at least three years; 3) Commit to abiding by CFA® Institute’s Code of Ethics and Standards of Professional Conduct. The exams test the candidates’ knowledge of investment theory, ethics, financial accounting and portfolio management. This course of study was formed in 1962 and is constantly updated to ensure that the curriculum meets the demands of the global investment decision-making practice. This graduate-level curriculum generally entails six months of study prior to each exam date. Pass rates vary from year to year, but since the first exam was given in 1963, the overall rate is 59%; fewer than 20% of the candidates pass all three tests within three years. The CFA® Institute is a global non-profit professional organization of more than 58,000 financial analysts, portfolio managers and other financial professionals in 112 countries. In addition to administering the CFA® Program, the institute is also recognized around the world for its investment performance standards, code of ethics and standards of professional conduct. There are some very well-known investment professionals who hold the CFA® charter: Abby Joseph Cohen, Gary Brinson and Sir John Templeton. The reasons why these famous names pursued the CFA® designation may vary, but I believe it is safe to say they all have one thing in common: the desire to be the best.” – investopedia.com
Grading Your Financial Advisor: An Easy Report Card
The following report can be used in several ways. The first section is a quickly-read overview, and will help you form an overall impression of your advisor’s comparative score. Section two applies the concepts to specific questions, with numerical scores that will produce an overall “grade.” While either section can be used independently, reading section one, and then completing section two, will produce the highest quality judgment of your advisor’s value as a professional to you.
Section One
- Disclosure Does your advisor tell you – and put in writing – everything you need to know to make an informed decision? Do you feel you understand costs, fees, risks, and conflicts of interest adequately?
- Objectivity Do you feel that your advisor makes recommendations purely in your best interest? Do you wonder if recommendations are made to benefit the advisor more than you?
- Stand-Behind If misunderstandings or outright mistakes have occurred, does your advisor accept responsibility and make things right without cost or attempt to assign blame to you? Have mistakes and lack of accountability cost you money?
- Disciplinary History Has your advisor – or their employer – had complaints from clients or action from regulators? This information is typically found at brokercheck. Have you checked? Does there seem to be a pattern of problems?
- Portfolio Turnover Do changes – or pleas to change – seem to occur frequently and for reasons you believe due more to commissions than prudent management? Do you suspect your portfolio is managed to target your wealth objectives, or for some other agenda?
- Employer Turnover Has your advisor moved around a lot, frequently finding greener pastures, and asking you to come along for the ride, producing extra work and expense for you? Do these changes impress you as being more for your or their benefit?
- Proprietary Products Does your advisor frequently suggest that their employers’ – or a collection from brands that their employer seems to favor – products are best in an unusually high number of instances? Do you wonder if these products are recommended because they are really best for you, or if because they are more profitable for your advisor and their employer?
- Reporting Clarity Do your statements clearly show you how much money you make or lose, clearly showing effects of cash flows, and disclosing all fees and expenses? Do they tie all your accounts together in one easy, informative format? After reading them, do you know, or instead grab a calculator, scratch your head, and just hope for the best?
- Credible Answers When you ask questions, do you get easy-to-understand answers that make sense, and you advisor is willing to put in writing and will actually deliver? Or are the answers so convoluted that you question their understanding, or willingness to be completely forthcoming?
- Wealth Management Simplification Does your advisor have the skill and concern for what is best for you in order to consider recommendations that are coordinated with your overall life objectives – considering estate, retirement, college, tax, investment, risk-management, and special items of interest to you – instead of focusing on their own particular business interests?
- Contact frequency/quality Does your advisor reliably stay in touch to update you with important information affecting your situation, remind you of how important your relationship is, and stay apprised of changes in your life so as to constantly upgrade the advice they render to help you adapt to changing needs?
- Life Simplification Does your advisor’s service help to simplify your life – maximizing your wealth and at the same time freeing you to spend less time worrying? Does it seem the strategies optimize your assets for your goals and dreams? Overall, do you feel they help you work less, and gain more?
- Risk and Suitability Does your portfolio seem to be a good fit for you, or is it too risky – go down too much in bad markets – or too conservative – not make enough of a return to satisfy you – for your needs and disposition? How well matched are recommendations with your situation?
- Service Speed and Accuracy Are your instructions quickly executed, with error rates approaching zero? Are your calls returned promptly – in a day or less? When you request information, do you get what you want fast and without hassle, in a format that understandably answers your questions?
- Investment Performance Does your portfolio seem to show the kind of profit you expect? Does it consistently meet or exceed market indexes without excessive risk? Do you know if you’ve done as well as clients of the best professional money managers?
- Risk Control Is your portfolio structured to control risk, so that pieces balance and it is unlikely that everything will go down at the same time, such as a tech-heavy account in the early 2000’s? Has your advisor explained the risk control techniques to your satisfaction, and have they proved effective by protecting your money in down markets?
- Service Commitment Do you know to what scope of service your advisor is committed, both legally and professionally? Have you purchased an investment product with no required ongoing service (other, perhaps, than lip service), or have you engaged for ongoing service of your investment needs? If there is service, is it described in a contract or agreement with your advisor? Does it require regular, ongoing reviews of your situation and portfolio? How frequently? With what degree of rigor?
- Fiduciary Capacity Does your advisor accept fiduciary allegiance to you? This means they accept legal liability to always act in your best interest, and be driven by your needs over their own pay or their employer’s directives. Have they put in writing that they are fiduciaries acting solely in your best interest?
- “Pure” or “Incidental” Advisor? Is your advisor a “pure” registered investment advisor, whose only business is advice, or an “incidental” advisor, such as a brokerage house, bank, or insurance company, whose advice is “incidental” to their sale of products? Incidental advisors are exempt under the SEC’s “Merrill Lynch Rule” from fiduciary accountability to you for their recommendations; “pure” advisors are fully liable for their advice.
- Cost to Terminate Are there significant costs to you if you decide to do something else with the money? Are “redemption fees,” “surrender charges,” “back-end loads,” account termination fees, or sales commissions imposed if you decide to get out?
- Compensation What you pay is critical, but frequently poorly communicated to clients by advisors. The most common, in order of prevalence, are: commission (sales agent for employer paid to sell you product, duty to employer, not you); fee-based (sales agent paid commission by employer for product sales and to collect fees for service, conflicted duty but mostly to employer, not you); and fee-only (only compensation is fees paid by you, duty is to you only as fiduciary). The compensation structure tells you a lot about the duty (or lack) to you, and bears close examination. If confused, in doubt, or overwhelmed by material, request (and insist on receiving) a simple one-page letter describing the compensation structure and duty to you.
- Total Product Costs Today’s investment products can be extremely complex, with many imbedded costs that are not easy for clients (or even investment reps, who may care more about figuring their commissions than the costs to you) to ferret out and understand. Be sure you receive detailed disclosure on all costs, including compensation, product costs (including surrender charges, market value adjustments, trading charges, management, and other expenses). If unsure (and most investors should be) request (and insist on receiving) a simple one-page letter describing all costs and charges, both at product, distribution, and liquidation levels.
- Credentials The financial world is extremely involved, and, like most professional endeavors, demands extended study for proficiency. While no panacea, professional educational credentials demonstrate at least an attempt at mastery. Look for advanced academic degrees in finance (or the somewhat less pertinent disciplines of economics, business, or accounting), or worthy professional designations like CFP, ChFC, PFS or CFA.
- Clear, simple answers to questions This is a great litmus test that is often overlooked. There is nothing in investments that can not be simply explained to the layperson of average intelligence, so that the concept is understood. When you ask questions, do you get reasonable, easy to grasp answers? Or are the responses hopelessly technical or mystifying? If the answers are not clear, it means one of only two things, neither good: the adviser does not know the answer, or knows but does not want to tell you.
- References The experience of other of the advisor’s clients offers a rare window on what you can expect. Is the advisor willing to give you the names and numbers of more than a few “pet” clients willing to speak off the record of their experience with the advisor? While the SEC’s “no testimonials” rule may inhibit firms from advertising that they offer references, those that make them available will give some to you if you remember to ask.
Clarity of duty What, exactly, are you getting when you engage the advisor? Is there a clearly described set of functions you can rely on them to deliver? Or a loose expectation that they will make recommendations or sell products when the opportunity presents itself? Financial services are usually expensive, even if the costs are not clear, as is often the case. Do you know exactly what you are buying, even if unclear as to what you are paying?
Section Two
Disclosure
- Does your advisor tell you – and put in writing – everything you need to know to make informed decisions?
2 – All fees, costs, any conflicts, and what I get for what I pay is clear
1 – Some attempts made but still unclear on costs, duties, and conflicts
0 – This information not forthcoming or intentionally concealed
- Do you understand costs, fees, risks, and conflicts of interest adequately?
2 – Yes – it is well and frequently explained
1 – Think so but really not sure
0 – No, or suspect hidden costs/conflicts that I should know about
Objectivity
- Do you know that your advisor makes recommendations purely in your best interest?
2 – Have no doubt
1 – Hope so but sometimes wonder if there’s a commission motive
0 – Think they care more about their pay than my best interests
- Do you wonder if recommendations are made to benefit the advisor more than you?
2 – No, my advisor’s incentive matches my interests
1 – Sometimes wonder
0 – Believe so
Accountability
- If misunderstandings or outright mistakes have occurred, does your advisor accept responsibility and make things right without cost or attempt to assign blame to you?
2 – I’m made whole quickly & advisor even points out his mistakes
1 – Advisor makes good but it’s like pulling teeth
0 – Does not acknowledge or correct mistakes
- Do you wonder if mistakes and lack of accountability have cost you money?
2 – No
1 – Yes
0 – It clearly has
Disciplinary History
- Has your advisor – or your advisor’s employer – had complaints from clients or action from regulators? (For companies, this information is typically found in news stories. For individual advisors/reps/planners, you can check by name on the at nasdr.com and myflorida.com). Reports of problems should be a major concern
2 – No complaints or disciplinary history
1 – A few complaints
0 – Pattern of problems
Portfolio Turnover
- Does your advisor make changes to your portfolio – or urge you to change – for reasons you believe are due more to commissions than prudent management?
2 – Never – changes well-reasoned and for my good
1 – Sometimes calls seem more for sales than management
0 – Believe all changes suggested mostly to benefit advisor
- Do you suspect your portfolio is managed to advance some agenda other than your own?
2 – No
1 – Not sure
0 – Think my advisor and their employer come first
Employer Turnover
- Does your advisor change affiliations to find greener pastures and ask you to come along for the ride, producing extra work and expense for you?
2 – Never
1 – At least once
0 – Several times or more
- Do you believe these changes are more for your advisor’s benefit than yours?
2 – No
1 – Not sure
0 – Think my advisor’s career and income come first
Proprietary Products
- Does your advisor suggest that products offered by his or her employers – or a collection of products from brands that the employer seems to favor – are best for you in an unusually high number of instances?
2 – Always
1 – Sometimes
0 – Never
- Do you wonder if these products are recommended because they are really best for you or because they are more profitable for your advisor and his or her employer?
2 – Always
1 – Sometimes
0 – Never
Reporting Clarity
- Do your statements clearly show you how much money you make or lose, clearly showing effects of cash flows, and disclosing all fees and expenses?
2 – Always
1 – Sometimes
0 – Never
- After reading them, do you know the status of your accounts, or instead grab a calculator, scratch your head, and just hope for the best?
2 – Always
1 – Sometimes
0 – Never
Credible Answers
- When you ask questions, do you get easy-to-understand answers that make sense, and is your advisor willing to put these answers in writing and actually deliver? Or are the answers to your questions so convoluted that you question your advisor’s understanding or willingness to be completely forthcoming?
2 – Get clear answers nearly always
1 – Sometimes get credible answers
0 – Never get straight answers
Wealth Management Simplification
- Does your advisor exhibit the skill and concern for your best interests that allow him or her to consider recommendations that are coordinated with your overall life objectives, such as estate, retirement, college, tax, investment, risk-management, and special items of interest to you?
2 – Knows me well, knows what they’re doing, takes care of me
1 – Sometimes tries to optimize my “big picture”
0 – Does not seem to know or care what is best overall for me
Contact frequency/quality
- Does your advisor call and/or meet with you frequently to update you with important information affecting your situation, remind you of how important your relationship is, and stay apprised of changes in your life so as to constantly help you adapt to changing needs?
2 – Frequent, quality contact designed to serve, not sell
1 – Occasional contact besides sales calls
0 – Contact infrequent or rare or pure “sales” calls
Life Simplification
- Does your advisor’s service help to simplify your life – maximizing your wealth and at the same time freeing you to spend less time worrying?
2 – My advisor makes my financial life very easy to deal with
1 – Financial life is complicated but manageable
0 – I get lots of confusing statements, but little quality info or help
- Does it seem the your advisor’s strategies optimize your assets for your goals and dreams?
2 – My advisor’s actions track my goals specifically
1 – There are some efforts to have recommendations pace goals
0 – My goals are not asked about or are not followed
- Overall, do you feel your advisor helps you work less and gain more?
2 – Strongly agree
1 – Somewhat agree
0 – No
Risk and Suitability
Does your advisor take the time to get to know you – and keep up with your changing situation – and make recommendations that seem well suited to who you are and what you want?
2 – Always
1 – Sometimes or not sure
0 – Never
Do investments recommended seem too risky (bigger losses) or too conservative (insufficient returns) than you want, need, and can afford?
2 – Great risk/return match for me
1 – Spotty match or not sure
0 – Poor match
Have losses occurred that seemed much out of proportion to what you were led to expect, or allowed to believe?
2 – Never – risks were clearly explained and understood
1 – Sometimes
0 – I am/was sometimes shocked by the difference between my expectations and what happened
Does your overall portfolio seem to be well balanced with the pieces complementing each other, or does your account seem more like it contains a number unrelated individual investments, which rise and fall on their own instead of as part of a well-engineered whole?
2 – Portfolio seems well integrated
1 – Spotty structure or not sure
0 – No apparent (or explained) relationship between components
Service speed and accuracy
Are your calls returned within one day?
2 – Always
1 – Sometimes
0 – Never
Are questions quickly answered to your satisfaction?
2 – Always get straight answers
1 – Sometimes clear, sometimes not
0 – Never – all I get is jargon or smoke
Are your instructions executed promptly, without excessive cost or error?
2 – Always
1 – Sometimes
0 – Never
Investment Performance
Does your portfolio seem to grow in line with your expectations, and at least pace market averages after all costs and expenses?
2 – Yes, and I know it
1 – Not sure
0 – Pretty sure it does not
Do you believe your return matches that of the best available money managers?
2 – Yes, and I know it
1 – Not sure
0 – Pretty sure it does not
Do you receive transparent reporting that lets you compare – without confusion – your returns to established indexes?
2 – Yes, and I know it
1 – Not sure
0 – Pretty sure it does not
Risk Control
Do you know if your portfolio employs risk control, and if so, has your advisor explained the techniques so that you understand and believe them?
2 – Yes
1 – Not sure
0 – No
The proof is in the pudding. During down markets, have your accounts held up better than you expected from the media, and heard from your friends? Did you sleep better knowing that it was unlikely you would suffer big losses?
2 – Yes, my portfolio’s been very stable
1 – Not sure
0 – It’s been a roller coaster, and sometimes I don’t want to look
Service Commitment
Have you purchased products, like mutual funds, annuities, or stocks or bonds, that seem to receive very little attention once the sale has been completed?
2 – No, my portfolio gets regular attention and management
1 – Not sure
0 – Yes, past sales receive little attention (except to sell something else)
Do you know – as opposed to hope or believe – to what scope of service your advisor is committed, both legally and professionally?
2 – Yes
1 – Not sure
0 – No
Have you purchased an investment product with no required ongoing service or have you engaged for ongoing service of your investment needs?
2 – Sure it is pure service (fee-only)
1 – Not sure
0 – Products, or products and service (fee-based)
Have you received a written statement describing the services you have purchased and are entitled to receive?
2 – Yes
1 – Not sure
0 – No
Are you receiving detailed, regular, useful reviews that help pace financial changes to your life changes?
2 – Yes: frequent, detailed, substantive
1 – Occasional reviews with some sales pressure
0 – Never, or haphazard, or only for sales purposes
Fiduciary Capacity
Does your advisor accept fiduciary liability that they are liable that the advice they render to you is purely in your best interest?
2 – Yes, they have made a point of telling me this
1 – Not sure
0 – No
Have they put in writing that you have received that they are fiduciaries acting solely in your best interest?
2 – Yes, and have it in writing
1 – Not sure
0 – No
“Pure” or “Incidental” Advisor?
Is your advisor a “pure” registered investment advisor, fully liable for its advice, or an “incidental” advisor, such as a brokerage house, bank, or insurance company, whose advice is “incidental” under the Merrill Lynch Rule to their sale of products, and for which they are not accountable for acting in my best interest?
2 – Pure, fee-only advisor
1 – Not sure
0 – Broker, bank rep, or insurance company agent (Merrill Lynch Rule)
Prudent Expert
Does your advisor adhere to the very highest legal standard for financial advice? Do they give you the same advice at the same cost that an investment expert would take for themselves? Have they (or will they) put it in writing that they accept legal liability for this standard?
2 – Yes, and have it in writing
1 – Not sure
0 – No
Cost to Terminate
Are there significant costs to you if you decide to do something else with the money, such as “redemption fees,” “surrender charges,” “back-end loads,” account termination fees, or sales commissions? Or does the advisor make it easy and pleasant to leave if you feel you no longer wish to purchase their service?
2 – No cost, actually will receive unused fee refund
1 – Not sure
0 – They seem to make it expensive to leave
Compensation
Do you understand clearly what you pay, and what you get for it? Are compensation costs now, and later, carefully explained to you, and do you feel comfortable that they are fair for what you get?
2 – Yes, clear and fair, and have it in writing
1 – Not sure
0 – No, and somewhat uncomfortable
What is the compensation structure?
2 – Fee-only, fully disclosed fiduciary
1 – Commission only or not sure
0 – Fee-based
Do you have it in writing?
2 – Yes, have it in writing
1 – Not sure
0 – No, or have asked but not received
Total Product Costs
Today’s investment products can be extremely complex, with many imbedded costs that are not clear. Have you received detailed disclosure on all costs, including compensation, product, distribution, and liquidation costs? Do you fairly understand them?
2 – Yes, clear and fair
1 – Not sure
0 – No
Have all costs been fully explained in writing to you, in a simple, one-page document?
2 – Yes, have it in writing
1 – Not sure
0 – No
Clear, simple answers to questions
This is a great litmus test. If answers are not clear, it means one of only two things, neither good: the adviser does not know the answer, or knows but does not want to tell you. When you ask questions, do you get reasonable, easy to grasp answers?
2 – Always clear answers
1 – Sometimes clear, sometimes not
0 – Rarely or never
References The experience of other of the advisor’s clients offers a rare window on what you can expect. Is the advisor willing to give you the names and numbers of more than a few “pet” clients willing to speak off the record of their experience with the advisor?
2 – Yes
1 – Not sure
0 – No
Clarity of duty What, exactly, are you getting when you engage the advisor? Is there a clearly described set of functions you can rely on them to deliver? Or a loose expectation that they will make recommendations or sell products when the opportunity presents itself? Financial services are usually expensive, even if the costs are not clear, as is often the case. Do you know exactly what you are buying, even if unclear as to what you are paying?
2 – Yes, advisor’s duty is clear, in writing, and what I want
1 – Not sure
0 – No
Scoring Section Two
Scoring is simple. Just add the point total from your answers (count twice to be sure!) and divide by X=total number of questions, someone please count!. Read your advisor’s report card grade below, along with the opinion for the grade.
A 2.0 Excellent! You seem to be in good hands. Congratulations!
B 1.6 – 2.0 Good. You would probably benefit from a second opinion, if only to fine-tune an apparently decent program.
C 1.2 – 1.6 Fair. Shop around.
D 0.8 – 1.2 Red flag. Attention required. Interview others.
F less than 0.8 Immediate action seems prudent.