Should your financial advisor provide advice that is in your best interest? It seems like a simple question that should not have to be asked. Clients think, “Of course they should!” Unfortunately, the industry does not see it that way. Large banks, wire houses and advisory firms have lobbied to create a grey area where their advisors are not always required to act as fiduciaries.
What is a fiduciary? A fiduciary is a person that acts on behalf of a client, putting their clients' interest ahead of their own. Being a fiduciary requires being bound, both legally and ethically to act in the client’s best interests1. So how do you know whether the advice you are getting is unbiased?
Here are 5 simple questions you can pose to an advisor to ensure you are working with someone who provides you advice that is in your best interest.
1. Are you always a fiduciary, and will you state that in writing?
Yes. The important word here is “always”. Many advisors engage in something the SEC calls hat-switching. The client hires the advisor as a fiduciary, though the scope of that responsibility is limited. If the client or advisor initiates a conversation about a product or service that is deemed to be outside the scope or is transaction related, the advisor ceases to be a fiduciary. Suddenly, they become a salesperson who is no longer legally and ethically bound to the higher standard. Confused? You should be. We believe in being a fiduciary for clients, in all circumstances.
2. Do you earn commissions or receive payment for using certain investments?
No. If any other answer is provided, the advisor has acknowledged they can engage in hat switching. Be cautious. You now must ask which hat the advisor is wearing when you are talking with them.
3. Will you itemize all your fees and expenses in writing?
Yes, and the list should be brief.
4. Can you tell me about your conflicts of interest, verbally and in writing?
Yes. Every advisory firm has certain conflicts of interest. The obligation of a firm is to limit conflicts. When possible eliminate them and if they cannot be eliminated, mitigate the impact on clients. Lastly, any conflicts that remain should be clearly disclosed. If an advisor says they have no conflicts, that is a red flag and is simply not accurate.
5. Do you focus solely on investment management?
Our firm is biased, in that we believe a comprehensive approach to wealth management best serves client interests over time. Investment, tax, estate, and insurance decisions do not occur in a vacuum. What you do in one area, impacts the others. That said, every client’s situation is unique, and some individuals would be better served by a firm that focuses on a single aspect of their overall financial situation.
This list is not intended to be exhaustive. We encourage clients to ask additional questions around investment philosophy, professional credentials, and details about how the firm manages investments. If you want to learn more about how our firm performs on this best practices checklist, please email us at firstname.lastname@example.org to schedule a brief, no obligation consultation.
2. Credit to Jason Zweig who authors The Intelligent Investor for the Wall Street Journal. His column “The 19 Questions to Ask Your Financial Adviser” inspired our slimmed down list.
This is not a recommendation and is not intended to be taken as a recommendation. This material was prepared for general distribution and is not directed to a specific individual.
LPWM LLC does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers.