Seeking Guidance

I am often asked where people can turn for help with their investments as well as their more general wealth management questions. It came up last night when an interview aired on WJAR-NBC-10 (to see the segment in full, go to http://www.turnto10.com/northeast/jar/home.html) and I mentioned one of those $10 words that most people hate: FIDUCIARY.

My friend Kristine likes to say that words like “fiduciary” are scary so I need to find another way to describe it, so here goes. When seeking financial guidance, whether it is investment management or more general planning issues, it is preferable to work with a professional who is legally bound to put your interests first and that’s what a fiduciary means. After all, why would you want to engage someone who actually does not have to do this? And yet, that is the de-facto choice that so many people make. While they believe that they are hiring someone to provide advice, they are actually working with an individual who is not bound by the law to put you first, and is instead can sell you assets that are simply “suitable” for someone like you but may put another entity’s interests before yours.

As Alina Tugend noted in the New York Times on April 26, 2008 (“Pick a Planner Who Can Spell ‘Fiduciary’”) “while most people hire a financial planner more casually than they might, say, choose a hair stylist, you really should go into it as if you are selecting a marriage counselor.” Tugend correctly advises, there are a myriad of folks who hold themselves out as experts or counselors or advisors, so it is up to you to ask the correct questions so that you understand who you are hiring and what you are getting out of the relationship.

In general, there are three types of people in the financial services industry: investment advisers, salesmen (either investment or insurance) and hourly financial planners. The hourly planner is easy: you pay a certain rate and receive advice on specific planning issues, like retirement, college, estate, etc. In my experience engaging an hourly consultant for portfolio questions may not be the greatest idea because the advice by its very nature must be dynamic. A salesperson sells you anything from a mutual fund to an insurance product and is usually paid by commission. The salesman is often not going to provide ongoing advice, unless he or she can earn another commission by doing so.

The last category is an investment adviser (IA), which according to the NYT, “is a legal term that describes people who are in the business of giving advice about securities, stocks, bonds, mutual funds and annuities. Anyone who manages $25 million or more in securities generally must be registered with the Securities and Exchange Commission. In most states, advisers who manage less than that should be registered with their state’s regulatory agency.” Full disclosure: I am registered as an IA and so is my firm, so my bias is clear—I believe that those professionals who take the time to register and are legally bound to work in the best interests of their clients are preferable to others. “Investment advisers have a fiduciary duty, while brokers and financial planners may or may not. It’s a confusing legal situation, so the best bet is to ask anyone you are considering hiring straight out, ‘Are you a fiduciary?’”

Of course, the other question that you should always ask is how the professional gets paid. According to Tugend, “Most experts I talked to said to be leery of financial advisers who work on commission because they have an incentive to get clients to trade and buy on the highest-commission products — an inherent conflict of interest.” Then again, there may be certain situations when a transaction-based or hourly planner could be appropriate. In general, if you are seeking ongoing wealth management, it usually makes sense to choose a fee model which calculates a percentage of assets under management.

Just like if you were hiring a lawyer or doctor, ask the potential adviser/broker about his or her experience and education. “A minimum, say the experts, is a degree as a certified financial planner, which means the adviser has a certain level of education and experience, as well as attends continuing education classes. Certified financial planners are also bound by a code of ethics that includes fiduciary duty.” Finally, make sure that you actually like the person. The relationship between an adviser and client is an intimate one. In addition to all of this information, trust your gut.