Our company, and many of our competitors, has committed to following the fiduciary standard, which demands higher accountability from advisers, including acting only in a client’s best interest. But is that enough to protect clients? Unfortunately, there’s always wiggle room.
For example, an adviser can tell clients which conflicts of interest exist in their relationship — and still overcharge for products. If investors aren’t well-informed, they may not understand the conflict’s significance, or that they’re even being overcharged.
No wonder headlines like “Why you still can’t trust your financial adviser” are making the rounds.
More than a fiduciary, investors should demand what I call a “capable fiduciary.” The term incorporates ethics and practices that go beyond just checking the regulatory boxes and performing the minimum amount required to follow the law.
To find one, start by eliminating bad apples before you begin interviewing potential advisers.
The Securities and Exchange Commission (SEC) provides all the resources you need. Finra maintains a database that flags individuals or firms for improper registration and keeps a history of disciplinary actions and complaints. More detailed information may be available from your state securities regulator.
In addition, every advisory firm files Form ADV, which discloses conflicts of interest and disciplinary information. It’s public information, and any ethical adviser will happily provide you with a copy. You can also download a PDF from the SEC’s website.
The information this research yields shouldn’t necessarily disqualify an adviser. But you should look for patterns. Are there lots of black marks against a company? Were they isolated incidents from years ago, or do they keep cropping up? Ask advisers to explain things that look odd to you, and be wary if the answers feel unsatisfactory.
Once you have a list of candidates that pass this first hurdle, you’ll want to evaluate how committed each one is to your financial success. Here are seven ways to discern many of the most important qualities that make an adviser a capable fiduciary:
• How much time are they willing to spend to understand your financial goals?Capable fiduciaries begin every relationship with a robust discovery process so they know you and your needs well. There’s no formula for how long it should take — but an adviser should be thoughtful and thorough, asking for more than just basic information about net worth, account values and birth dates.
• How are they compensated? Is the fiduciary fee-only, or fee-based? In other words, does the adviser charge extra for financial planning and other services? Financial planning is a foundational part of building an integrated financial strategy, and we believe clients shouldn’t pay more for essential services. Ultimately, however, what’s most important is that advisers are transparent about how they may charge you depending on the services you use.
• What degrees and professional designations does their team have? Most members of any team should be Certified Financial Planners (CFPs), and other designations such as Chartered Financial Analyst (CFA), Masters of Business Administration (M.B.A.), Accredited Investment Fiduciary (AIF), and Certified Private Wealth Advisor (CPWA) are signs that a company employs people who are adding to their capabilities all the time. Capable fiduciaries are likely to employ professionals specializing in areas like estate planning, social security, taxes, and business transitions.
• Are they willing to customize investment strategies when needed? Advisory fees are earned, not simply “harvested,” and you should ask for examples of how an adviser has responded to changing conditions for their clients. (How, for example, has the firm responded to persistently low interest rates for clients who need current income?) The traditional default diversification strategy of 60% stocks, 40% bonds isn’t effective in the current environment. A capable firm will research and innovate new strategies on their clients’ behalf.
• Do they ask hard questions? Advisors must be willing to have fearless conversations with clients. Planning should also address painful contingencies such as deaths in the family, divorce, and market downturns. And they should be willing to challenge clients: If your spending levels are compromising your ability to maintain financial independence in retirement, for example, the adviser needs to raise the topic.
• Can they help you get any specific help you need? Maybe you’re moving to a retirement community and need help weighing the financials. Or you need help planning how to support a special-needs family member. Or you’re considering the pros and cons of various charitable trusts. Capable fiduciaries don’t say: “that’s not in my job description”. They say, “Let’s look at this together.” They don’t hesitate to dig in and help — and if they can’t, they’ll gladly refer you to people who can, even if they’re not on their staff.
• Do they have a plan for their own future? What is the firm’s succession plan? Is the adviser looking to sell out to a competitor? Or nearing retirement? A firm that’s worthy of your trust should have prepared careful groundwork for its own future so you can know they’ll continue to take care of you.
Ultimately, capable fiduciaries take those “old-fashioned” responsibilities like trust, duty, and loyalty to clients to heart. And, critically, they offer the depth of capabilities required to see clients through challenging investment environments. The extra time you spend making sure you get one is well worth it.
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This story was first published on Sept. 15, 2017.