Whether you’re thinking about hiring a financial advisor or you’re already working with one, you want to make rock-solid sure that the person is someone you can trust, someone who will nurture your hard-earned nest egg, treat it with respect and help it grow.
You yourself have to make the final call as to which planner you’ll be working with, but there are some threshold measures you can use to unearth the extent to which the planner is on your side.
The first thing you’ll want to know is whether the planner is required to stick to:
- The suitability standard
2. The fiduciary standard
Planners make a big deal over being a fiduciary – and they should. Planners are held to one of two standards: the suitability standard or the fiduciary standard.
The suitability standard has some holes in it bigger than Wall Street. The suitability standard simply says that any investment a planner suggests has to fit the client’s financial experience, time horizon and financial objectives.
So what’s wrong with that? Actually, it’s pretty good as far as it goes. Of course, planners should not suggest that rookie investors put their money into complicated, sophisticated commercial real estate transactions, for example. And if investors want their investments to pay for a kid’s college education in several years, then a planner should shy away from advising those investors to plunk down money into penny stocks, which are really cheap – there’s a reason they’re called penny stocks – but often go bust in a hurry. Bad bet for the long run. In addition, if investors are looking primarily for their investments to pay most or all of their living expenses, then buying a stock with no dividend would probably be way off-target for their financial objectives.
All of that seems to be just common sense. But the suitability standard comes complete with gaps. It doesn’t require an adviser to disclose any conflicts of interest. If planners who are subject only to the suitability rule recommend an investment for which they get a commission – or for which they get a bigger commission than for recommending an investment that’s better for you but not as profitable for them – they don’t have to tell you what they’re doing, as long as their recommendations fall within the range of suitability.
Really. They don’t have to utter a peep.
They also don’t have to tell you which investment is best for you or costs the least. They could plop three investments in front of you and tell you to just pick one. All they really have to tell you is that an investment is not inappropriate.
The fiduciary standard takes a 180-degree turn. Fiduciaries must, repeat, must legally put the interests of their client – that’s you – ahead of their own. If one investment pays the adviser less than another similar investment, the adviser generally must suggest the one with the lower commission, because it will cost you less. And, of course, you must be told about any conflicts of interest.
In addition, a fiduciary also must tell you not only which investments cost less but also which ones will be the most effective for you.
If you spot the planner hesitating in the least when you ask whether he or she is a fiduciary, start edging toward the door. Someone who’s a fiduciary should be shouting that fact from the tallest building in town. Well, OK, maybe there’s no need to be that conspicuous about it. Nonetheless, being a fiduciary means that the way the planner approaches his or her recommendations to you must meet a higher standard than a planner who only has to meet a standard of suitability. A planner who is a fiduciary has achieved a designation which carries a lot of weight – and a lot of responsibility towards the client. That’s you.
The next step: When a planner says that he or she is a fiduciary, put them to the test: Ask them to put that fact, as well as an enumeration of the planner’s responsibilities toward you, in writing. Again, the slightest hesitation should act as a wildly flapping red flag.
But it’s always possible that you may be interested in working with a planner who’s not a fiduciary. If that’s the case, then require that planner to put in writing that you will be told about any of the planner’s conflicts of interest and in addition that the planner will divulge what the commission is on each financial product as well as what recommendations are best for you.
If the planner says anything but “Yes, of course” then run screaming for the exits. They’re playing games with you. Don’t even trust your pocket change with this person.
Simply put, you want to be able to trust the person who’s managing your money or is advising you what to do with it. The first questions you ask when you walk into a planner’s office should be about whether the planner is a fiduciary and what commitments to you he or she is willing to put in writing. Don’t even sit down. If the planner passes these tests, then take a seat. If not, just spin on your heel and walk out. There are plenty of fish in the sea. There’s no reason to buddy up with a barracuda.
Incidentally, many planners will work with clients on a fee-only basis. Instead of getting paid by commissions on products they recommend, or a combination of fees and commissions, they charge by the hour for their advice or take a percentage of the money they’re managing for you (usually 1 percent). Their not being paid any commissions should obliterate any conflicts of interest. Still, for your own peace of mind, make sure the fee-only planner is also a fiduciary and will put that fact in writing.
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David Kohn is a veteran journalist and investigative reporter recognized as Your Straight-From-the-Shoulder Advocate. He specializes in helping people make decisions about high-ticket items and services. For more in-depth information about choosing the right Financial Advisor visit: www.pickingyourfinancialplanner.com.
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