Today, I’d like to address an important subject … but first, I have a confession to make. Recently, I had a conversation that made me realize I had been subconsciously assuming that everyone “just knew” how to differentiate a financial advisor from a financial trader, and why that would even matter.
I won’t go into the details, but basically the incident was a wake-up call for me. Why had I been taking this important understanding for granted? That, I confess, is my bad. I can see why we financial folk may sometimes come across as mostly interchangeable, but it’s important for people to know that we are not. A number of seemingly subtle differences can have a major impact on your investment experience.
So let me share a few qualities that I recommend you look for in your financial advisor.
First, There Is Fiduciary
In the medical profession, physicians practice according to a familiar standard: “First do no harm.” It seems that there should be a similar level of commitment for anyone who wants to advise you about your financial well-being, right?
Unfortunately, wrong. Financial advice is subject to a double legal standard: “fiduciary” versus “suitable” advice. Worse, it’s up to you to spot the differences between them, and heed the quality of the advice accordingly.
Fiduciary vs. Suitable: Different Incentives Drive Different Advice
Why the different legal standards? Government regulators assume that a broker’s primary role is to place trades, so any advice he or she offers is considered secondary to this main, transactional business. As such:
- A broker’s advice must be suitable for you, but it does NOT have to be best for you.
- A broker does NOT have to tell you about underlying incentives that may be influencing his or her recommendations.
Let’s provide an example of how suitable and fiduciary advice can differ from one another. Imagine you are comparing two mutual funds that are equally appropriate for your portfolio, except one entails higher fees that just happen to offer a bigger commission to the trader. Brokers offering suitable advice can freely recommend the fund that compensates them more handsomely at your expense … without disclosing the underlying incentive to you.
On the other hand, if all else is equal between two investment selections, a fiduciary advisor must recommend the lower-cost investment that represents your best interest. It would be illegal for us to do otherwise.
Fiduciary vs. Suitable: How Do You Know?
One way to determine whether your advisor will be acting as your fiduciary is to ask. Will your relationship with me be only and always as my fiduciary advisor? Have them agree to this in writing, and take no less than an unqualified “Yes.” If someone will not or cannot agree to always act in your best interest under all circumstances, of what worth is the advice?
Beyond accepting fiduciary duty, there are a couple of other ways you can identify whether your advisor is sitting on the same side of the table with you.
- Business Structure: The Registered Investment Advisor Firm – By law, independent Registered Investment Advisor firms must provide strictly fiduciary advice to their clients. In contrast, brokerages, banks, insurance agencies and other transactional businesses more typically offer only suitable advice.
- Regulatory Agent: Seek State or SEC Oversight – When a firm and its team of advisors are providing only suitable advice, they may not go out of their way to tell you so. A short-hand approach to sorting out the players is to determine which financial regulator oversees the firm by checking their fine print.
- SEC or State Oversight – Registered Investment Advisor firms are regulated by the Securities and Exchange Commission (SEC) or by their state, depending on firm size (assets under management). These firms must accept a fiduciary duty to their clients.
- FINRA Oversight – Brokerages and other transactional businesses are regulated by the Financial Industry Regulatory Agency (FINRA) and are more likely offering only suitable advice.
- Dual Registration – If you see references to both FINRA and the SEC in a firm’s disclosures, that’s the calling card of dual registration. When it’s easy enough to find a fully fiduciary advisor, why complicate things with potentially dueling, dual interests?
Finding Your Fiduciary Financial Advisor
We hope you’re convinced by now that the first order of business is to understand an advisor’s true role and ensure that his or her advice will be of the highest, FIDUCIARY standard, with the commitment confirmed in writing. After that, look for someone you get along with on a personal level. If you and your advisor don’t “click,” even good advice will be hard to take, as described by author Seth Godin:
“Good advice … is priceless. Not what you want to hear, but what you need to hear. Not imaginary, but practical. Not based on fear, but on possibility. Not designed to make you feel better, designed to make you better. Seek it out and embrace the true friends that care enough to risk sharing it. I’m not sure what takes more guts – giving it or getting it.”
We are proud to be a fiduciary Registered Investment Advisor firm, registered in the state of Virginia and guided by your highest financial interests. Together, let’s explore your own financial possibilities.
Mark Shelby is President of Vertical Investments, LLC. a Registered Investment Advisory firm offering fee only financial planning serving Virginia Beach, Norfolk, Mclean, Tysons Corner, Reston and Williamsburg Va. Vertical Investments helps successful individuals and families with comprehensive wealth management needs.
This article is for informational purposes only and should not be construed as specific investment advice tailored to an investor’s unique needs, risk tolerance, and investment objectives. Investing entails risks, including possible loss of principal. There are special risk considerations associated with value strategy investing, international investing (including emerging markets), and small company investing. Consider the investment objectives, risks, and expenses of any mutual fund carefully before investing. This information does not represent a recommendation of any particular security, strategy or investment product. Vertical Investments is an investment advisor registered with the Virginia State Corporation Commission. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. Past performance is not indicative of future results and no representation is made that stated results will be replicated.
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