Who Is Your Financial Advisor?
I’d like to introduce you to Dante and Diamond. They are “financial advisors.”
Dante is a Dogo Argentino. He is a big talker. He will sell you anything. Diamond simply has no “off button.” She will wear you down. The inseparable pair are rescues from the pound.
Are you confused as to how they are financial advisors? You should be.
To most people, hiring a non-qualified person to handle your precious savings is just as silly as trusting your assets to your dog.
Unfortunately, there are no rules or regulations governing who can call themselves a “financial advisor.” Anyone can print up a business card, assign a title and open an office. This should be a huge red flag prompting a slew of questions.
Furthermore, different investment professionals have different duties and obligations to their clients. Although attempts have been made to streamline the obligation, it continues to be quite confusing.
Under prior administrations, the Department of Labor attempted to implement a rule that would require any advisor working with retirement plans must function in a fiduciary manner. That sounded logical. Unfortunately, this fiduciary mandate failed.
The fiduciary obligation simply means an advisor must put the clients’ best interest first and foremost. We can’t imagine requiring anything less.
Currently, stockbrokers have a “best interest” obligation to a client. As such, they are legally required to act in your best interest only at the specific moment an investment recommendation is being made. That leaves a lot of gray area to be navigated as they do not owe a continuous, ongoing fiduciary duty to the client.
Conversely, a registered investment advisor has a legal obligation to provide services in a fiduciary manner no matter the account type, product or trade.
Given the difference in standards, it helps to know certain questions to ask so you can make the best decisions about your money.
Every relationship has conflicts of interest. Understanding this, begin by requesting in writing the number of ways a financial advisor will benefit from selling certain products or managing a relationship. The document should be written by the advisor. By putting it in writing, it must pass through their compliance department. Generally, the compliance department will not allow them to put something in writing that will come back and bite them later. If someone will not document the nature of the relationship in plain English, then you know the relationship is not worth pursuing.
Often a broker will claim the cost is outlined in a prospectus or other lawyer-drafted verbiage. If the advisor cannot explain the issues in their own words, then quite possibly they don’t have full command of the issues or are uncomfortable identifying the pertinent facts.
Do they have a fiduciary standard or the lesser “best interest?” In comparing the two, how will this change the advice and recommended products placed in client accounts?
If a broker functions under a best interest standard it does not mean they are dishonest. Rather, it means there is a potential conflict of interest. The wise investor will take the time to ask intelligent questions, identify the conflicts and mitigate them.
What are the professionals’ credentials? There are more than 100 designations for financial advisors. Some genuinely give an advisor a solid foundation to help clients, while others are nothing but marketing ploys.
Determine where they went to school and what degree(s) or designations they have achieved. In the world of finance, a license is not an educational achievement or qualification, but rather a knowledge of laws and regulations. Sometimes, the rules can be used to help, or harm, a client.
Obtain contact information for their governing body. Go to the governing body and determine if they actually have the designations they claim and determine if they in good standing.
What did they do to get the credentials? Are the credentials in question worth anything or is it just advertising?
How will these credentials actually help you? If someone is a Certified Divorce Specialist, but you need help with college planning the credentials may be irrelevant. Make sure you are hiring a professional who can get you where you need to go.
Taking the time to ask these types of questions, up-front, will greatly increase the odds of getting the advice you need and deserve—and not just a cute face. In the meantime, Dante and Diamond will gladly give you advice in exchange for dog treats!
Dave Sather is a Certified Financial Planner™ and the CEO of the Sather Financial Group, a fee-only and fiduciary investment management and strategic planning firm.
