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Financial Advisor Archives | R | W Investment Management

Is Your Financial Advisor a Legal Fiduciary (and Why is that Important?)

If you hire someone who goes by the title of “financial advisor”, you expect them to place your interests before theirs. After all, doesn’t the word advisor imply that they provide true advice?

Many investors are surprised to learn not everyone who uses the title “financial advisor” is legally bound to act in your best interest.  In 2018, the picture became muddier. In March, a Court of Appeals vacated the Department of Labor Fiduciary Rule. This Fiduciary Rule was proposed in order to require financial professionals who provide advice to retirement savers to act as a legal fiduciary.

What exactly does this mean? If you are a fiduciary, you are legally responsible to place the client’s interest before your own. It is much like the responsibility an attorney has to their client, or a parent has to his or her child. Negligence can and should come with legal consequences.  When it comes to professional advice about your money, implied consequence can be a very good thing. Unfortunately, the financial industry has made it confusing to know whether or not you are working with a fiduciary.

Understanding the Fiduciary Role

Other professions regularly act as fiduciaries. If you retain an attorney or see a medical doctor, for example, they are each required to do what is best for you…not what is best for them. That means the attorney must make recommendations based on your best interest, not what will generate more fees for his or her practice. The doctor may not prescribe any procedures or medications that are not in your best interest.

Not all financial professionals are held to that same fiduciary standard. It is perfectly legal, for example, for a non-fiduciary advisor to recommend a more expensive mutual fund to you, as long as it is deemed “suitable” or appropriate for an investor’s objectives and risk tolerance.  This suitability can be documented simply by requesting the client complete a questionnaire.

As an investor, it is of the upmost importance that you know whether you are working with a fiduciary advisor or a commissioned broker. Investors may end up paying more simply because the suitable product pays a higher commission to the advisor.

Who’s Who of Fiduciary Financial Professionals

While most professionals these days go by the generic term of “financial advisor” or “wealth advisor” …the actual licensing and registration can tell you if they are a fiduciary or not.  Anyone who is licensed as a Registered Representative is not a fiduciary. In fact, they cannot charge you a fee for advice. Rather, Registered Reps will charge you a commission for product recommendations and implementation. Does this sound like an advisor to you? Actually, it sounds more like a salesperson. While Registered Reps may be competent and educated, it is critical to know if you are receiving true advice or product recommendations that result in a commission.

If you walked into a Ford dealership and asked which car they recommend, you are more than likely to drive away in a brand-new Ford. The salesperson is incentivized to sell you a Ford even if a used car or a different brand would have met your needs at a lower cost.  Registered Representatives are held only to a “suitability” standard. That means they must simply recommend something that could be appropriate for you. Even if the one they recommend pays them a (higher) commission, as long as it is documented as “suitable”, there is no problem.  In fact, a Registered Representative’s first loyalty is to their employer and shareholders…not you, the client.

Fortunately, not all financial professionals operate this way.  Those who are licensed as Investment Advisor Representatives (the employees) or Registered Investment Advisors (the firms) are held to the fiduciary standard. They must always place client interests before their own. A conflict of interest may not be present in the relationship. If they do not place your interests first, you have legal recourse.  Instead of receiving commissions from products, fiduciaries are only paid a fee for advice.

 The High Cost of Conflicted Advice

If a Registered Representative has placed a product in your account for the sole reason of making a commission, then you have experienced  a conflict of interest.  A White House Task Force estimated that this “conflicted advice” costs Americans about $17 billion per year.  While you still may end up with a solution that generally works, your investment expense will be greater as a way cover these commissions. Over time, these small expenses can have a real effect on your total return.  Ideally, investors should avoid conflicted advice altogether.

Always Find Out

It is not always easy to discern who is a fiduciary and who is not.  Some advisors are “dually registered” as both a Registered Representative and an Investment Advisor Representative acting as a fiduciary only some of the time.  Most investors are not in the habit of questioning the advice they receive or asking if the recommendation represents a conflict of interest.

Get it in writing

It is vital that you are confident in the financial advice you receive:  are you  dealing with a legal fiduciary, or not?  We always recommend clients visit the following websites to research potential financial advisors.

However, one easy way to find out is to ask the prospective advisor this one question:

Will you act as my legal fiduciary at all times?

And ask for that in writing.  If that isn’t happily provided, you just learned something very important. It is safer to keep looking and limit your search to those who will act as your legal fiduciary.

Photo of Ryan C. Warwick of RW Investment

Ryan Warwick is Principal of R|W , a Registered Investment Adviser. R|W is a fee-based financial planning and investment management firm headquartered in Boise, Idaho serving families nationwide. Our advisors hold the Certified Financial Planner™ designation and the Chartered Financial Analyst® charter and serve as trusted stewards to help families preserve and grow their wealth for over three decades. Visit us at https://www.rathbonewarwick.com/.

 

How to Find The Best Financial Advisor in Boise, Idaho

If you are actively looking for a financial advisor in the greater Boise area, you have many choices. There are a multitude of financial professionals qualified to help with investment management, financial planning, estate planning and other needs.

Overwhelmed by the sheer number of firms, most people turn to their friends and family for a referral. Your network can be a good resource. However, with financial advisors, it can be dangerous. Why? Because most people have no idea what to look for and end up just hiring someone they like.

The following questions can help one analyze various financial professionals:

  • Is the person qualified to do the job?
  • Do they have the right education and professional designations?
  • Do they have enough experience to help me protect and grow my wealth?
  • Have they helped people like me achieve their goals before?
  • Are they ethical and do they have a clean record?

Answering these questions can help you avoid outright fraud or protect you from a negative experience that might result is significant heartache over time

Avoiding Conflicted Advice

While the idea of a Bernie Madoff is frightening, his boldness is relatively rare. The bad news, however, is that many financial professionals are not required to legally have to place your interests first and eliminate all conflicts of interest. In fact, some who use the title ‘advisor’ may not even legally be able to provide you with true advice.

This concept is called “conflicted advice” and unfortunately, it is quite common. Conflicted advice can occur when you unknowingly engage with a financial professional not legally required to place your interests in front of their own.

Usually, it is not personal or malicious. The advisor working for a large brand name bank or brokerage will have a first loyalty to their employer and the company’s shareholders. This may incentivize them to recommend that you buy more expensive financial products, simply because it is best for the company’s bottom line.

Is ‘conflicted advice’ an isolated incident? The research says no. A White House Council of Economic Advisors report estimated that “conflicted advice” costs Americans about $17 billion every year.

As you can guess, it is not always easy to find true, unbiased financial advice if your advisor is placing the company’s profitability before your needs. Thankfully, if you know the right questions to ask before you hire an advisor, you can be confident.

How to Find the Best Advisors

Here are five questions you should ask prospective financial advisors.

Question 1: Are you a Fiduciary?

A ‘Fiduciary’ is a person legally required to put your interests before their own. You want a fiduciary helping you with your financial planning and investing. Not all financial advisors are fiduciaries. Many of the brand name firms are not required to act in a fiduciary capacity. Instead, their representatives act as product salespeople who can legally recommend more expensive products to you, as long as they are deemed “suitable”.

Investors do not want to be questioning each product recommendation or the commission paid to the salesperson. You do not want to have any part of your money contribute to that $17 billion per year in conflicted advice.

To avoid this, always ask every prospective advisor: will you act as my legal fiduciary at all times? And, get it in writing, or better yet, as part of your client contract.

Question 2: What are your professional designations?

Being required to do the right thing, of course, is critical. But requirements can only get you so far. You also need to find an advisor who has the knowledge and skill to help you define and meet your goals.

With investments, this is extremely important. You want an advisor who is skilled at managing client wealth through all types of markets and economies.

While hard to measure, look for the right designations or professional credentials. But not just any credentials. Look for the “big three”:

  1. CERTIFIED FINANCIAL PLANNER™ professional
  2. Chartered Financial Analyst
  3. Certified Public Accountant

To learn about these three designations and why I recommend looking for them, see my previous article on financial advisor designations.

Question 3: How Do You Charge for Your Services?

When it comes to your money, the fees you pay matter. Over time, they matter even more. Sadly, many people don’t understand how their advisor is compensated. If you haven’t asked what you are paying, there is no way to make sure you’re not overpaying.

So, it’s best to work with an advisor who provides a transparent and easy to understand fee schedule. Your advisors should always be happy show your fees and expenses in writing so you can easily keep track. If your financial professional is not willing to do that, or cannot clearly explain how they are compensated, consider it a red flag. The best advisors believe in transparency and will appreciate involved clients that ask a lot of questions.

Question 4: Do you have any complaints or issues on your record?

One thing working in your favor when hiring a financial advisor is that the industry is regulated. Each person who is registered has an industry compliance record. Sadly, most consumers don’t even think to check these records. Don’t fall into that trap—there are more financial advisors with regulatory issues than you might think. In fact, according to research by the Wall Street Journal, about one in eight advisors or brokers have compliance issues on their records. These issues may be client complaints, actions by regulators, bankruptcies, terminations, even criminal proceedings…all things you want to know.

In addition, this research found that:

  • An estimated 70,000 advisors have at least one disclosure
  • Nearly 3,000 advisors have at least five disclosures

Always ask and then verify to make sure that you were told the truth. It’s simple to search by name using the Financial Industry Regulatory Authority website: https://brokercheck.finra.org/ and the SEC’s Investment Adviser Public Disclosure website: https://www.adviserinfo.sec.gov/IAPD/default.aspx.

Any advisor you consider should have a clean compliance record. With your financial future at stake, do not make an exception.

Question 5: How do you keep your clients fully informed about their money?

In surveys about satisfaction with financial advisors, one of the most frequent responses is concerns about the frequency of communication. Many financial advisors start strong when they get a new client, but then get comfortable and communicate less and less. That may be human nature, but you need to know the status of your money at all times.

Look for an advisor who has systems that helps keep you informed:

  • Performance reports
  • Meetings scheduled at specific intervals
  • Regular phone calls or email check ins
  • Easy to reach by email or phone
  • Quick response time

Why is this important? The best results are achieved when you interact with an advisor frequently. If paying for full-service and comprehensive advice, you should use the services to help you achieve your financial goals. One of the most important roles advisors play in their client’s lives is to act as an emotional buffer between their money and a big financial mistake!

It’s always a good idea to discuss big financial decisions with your advisor:

  • Should I refinance or pay off my mortgage?
  • Should I buy that rental or vacation home?
  • Should I sell my existing home and downsize?

Additionally, you and your advisor should talk or email frequently to make sure you are staying on track with your financial goals. That can be the difference between truly achieving your financial goals or simply those goals remaining dreams and wishes. The interaction is key and will help keep you both accountable.

Conclusion

As you can see, there is some homework to do to make sure you hire a high-quality advisor. It’s important that you research carefully, as this decision can impact your future quality of life. Use these questions to find an advisor who is a great fit.

Once you’ve found one, stay involved, because the fact is, no one will watch your money as closely as you will.

  • Always review your statements as they come in and look for anything you don’t understand
  • Monitor the fees and internal expenses to make sure they are reasonable and what you agreed to

It’s also a good idea to periodically check FINRA’s brokercheck.org to look for new filings.

Bottom line (and don’t ignore this): If there are any concerns or red flags, deal with them quickly. Your family’s security and financial future are too important.

Photo of Ryan C. Warwick
Ryan Warwick is Principal of R|W , a Registered Investment Adviser. R|W is a fee-based financial planning and investment management firm headquartered in Boise, Idaho serving families nationwide. Our advisors hold the Certified Financial Planner™ designation and the Chartered Financial Analyst® charter and serve as trusted stewards to help families preserve and grow their wealth for over three decades. Visit us at https://www.rathbonewarwick.com/.