My work is dedicated to helping independent investment advisors launch and build successful advisory firms while helping them meet their registration obligations, adhere to their fiduciary duty and maintain proper regulatory compliance along the way. But from time to time I get to thinking about how consumers or investors perceive this entrepreneurial and highly regulated industry.
If investment advisors are challenged in keeping up with complex and evolving regulatory, business and investment issues, certainly their clients must feel completely in the dark.
Katarina Sundelin | PhotoAlto | Getty Images
Consumers and media broadly refer to my clients as financial advisors. However, these same people would clearly distinguish an individual “doctor” as being, specifically, a pediatrician, heart surgeon, dentist or psychiatrist.
These differences are important; they truly matter. Why does the public seem to “get it” in terms of other professionals they deal with â€” but not when it comes to the person giving them financial advice?
At your next social gathering, ask your friends if they know whether their financial advisor is a broker (also called a registered representative) or an investment advisor. Ask them about what services this professional is obligated to furnish them.
Or really get into it by asking if they know the standard of care by which their financial professional must furnish those services. To that point, must the professional’s recommendations be in the best interest of their customer, or can they merely be “suitable”? Finally, ask how their financial advisor and the advisor’s firm get paid.
Advisors, investors off mark on risk tolerance
On second thought, if this is a social gathering, you may not want to ask these questions â€” since you probably want to be invited back again at a later date.
In today’s muddled financial markets, amid complex financial products, consumers of financial services have been led to believe that an advisor is an advisor and that their fees are their fees. But the term financial advisor has been generically used when referring to a range of individuals who can offer investment advice, from brokers to investment advisors to insurance salesmen â€” and all are not created equal.
Brokers can only offer you investment advice that is incidental to them buying or selling financial products, whereas investment advisors are professionals who are paid by you to give you advice â€” advice that is in your best interest. The latter is called a fiduciary responsibility.
It’s important to understand that both have their own appealing qualities, and make no mistake, there are good and bad people and firms within each group.
“When choosing the right financial expert, you really must assess your own needs. What do you really want or need out of a relationship with a financial advisor, and what is that worth to you?”
So when people ask me to recommend a financial advisor among all of my clients, I shrug my shoulders. Sure, the process begins with a general education about what distinguishes the different types of financial advisors.
When choosing the right financial expert, you really must assess your own needs. What do you really want or need out of a relationship with a financial advisor, and what is that worth to you? The selection of the advisor comes last.
Ask yourself these key questions:
Are you looking for advice on individual stocks or someone to manage a diversified portfolio for you?Are you looking for a product to solve a problem or a long-term financial plan?Are your assets straightforward, or will you need more coordination because of complex estate-planning issues?Are you an employee of a company, or might you be dealing with potentially complex tax issues, like selling your business?Are your issues acute and immediate, or will they be ongoing or recurring?How much do you want to rely on the recommendations of your advisor, or do you want to be the ultimate arbiter of what’s best for you, whether to follow a recommendation or not?Are you prepared to evaluate each recommendation to determine whether it’s aligned with your needs?
Wronged investors win cases but never collect
Regardless, I assure you that there’s a financial professional for that â€” but what type of financial advisor is right for your situation?
Make an honest appraisal of the role you’re looking or willing to fill. Before making arrangements to see a doctor, you know whether you are having chest pains or just need an annual physical. And you probably don’t want to enlist an orthopedist for either.
Once you determine your needs, only then can you begin to assemble a shortlist of advisors to visit. Now let’s figure out how to tell who’s good from who’s great â€¦ for you.
Start with the background check. And when you do, you’ll see why many folks are confused. Whether you’re looking for brokers at the Financial Industry Regulatory Authority’s BrokerCheck website or investment advisors at the Securities and Exchange Commission’s Investment Adviser Public Disclosure site, you’ll find the same results, both brokers and investment advisors.
What’s in a name? Decoding financial advisor terms
Wavebreak | Vetta | Getty Images
Convenient, perhaps, but certainly confusing. The home page for BrokerCheck states that “BrokerCheck can tell you if a broker or brokerage firm is registered.” And then, with seeming sleight of hand, it states that “individuals and firms can be registered as brokers or investment advisors â€” or both. Individuals with these designations have particular knowledge and take on legal responsibilities. Individuals and firms must be registered with FINRA (for brokers), the SEC (for certain investment advisors) and in those states where required by law.”
Confused? I don’t blame you.
But that confusion isn’t isolated. The same page espouses that BrokerCheck can tell you about what a broker or brokerage firm is “able to do.” And then, “brokers and investment advisors are qualified to perform certain tasks for clients, based on the exams they have passed and state licenses they hold. Individuals and firms must register in each state where they have customers.” The former is unclear; the latter is untrue for investment advisors.
When you’re looking into an advisor’s background, keep in mind that it’s not unusual for him or her to have some type of involvement with client, employment, legal or regulatory disputes, so these disclosures alone are not necessarily reason to set an advisor aside.
Some advisors find themselves embroiled in quite protracted matters but come out better on the other side of an ordeal. Look for patterns that show customer dissatisfaction â€” these could point to real issues with their performance or service.
Advisors harm clients by trying to ‘do it all’
Once you’ve honed that list of potential financial advisors even further, it’s time to visit with them and conduct an interview. They’ll all have a presentation for you. But if I came upon a “financial advisor” whom I was considering hiring, here are some of the questions I would ask him or her â€” and insist on an answer in clear, plain language:
What are the services I am hiring you to perform?What are your conflicts of interest?Identify for me all of the ways you or your firm are compensated by me or by any other party in connection with services rendered to me or my assets.Do you have a fiduciary duty to act in my best interests?Describe your insurance coverage.
All are critical issues. But there’s even one more to keep in mind when looking for a financial advisor. It’s to anticipate and counteract your own apathy and embarrassment.