Who Can You Trust for Financial Advice?

Do you know the difference between financial advisors, consultants, counselors and planners when it comes to looking for financial advice? Most people don’t. Understanding whom you can trust for financial guidance and recommendations for your personal financial goals is a complex but important task. It is no wonder most people are confused about “who’s who” and “who does what”—the financial industry has many arms and figuring them out can be difficult. Are the solutions presented by your advisor or broker really the best option for your present and future needs? Are they cost-efficient choices? Do they balance all your needs? If you are not a financial industry insider, how do you know how the financial world truly works? That is what I will cover in this article.

Check Out Your Financial Advisor’s Credentials

In order to protect yourself from unwanted, inappropriate and financially devastating results, you need more information on the person from whom you are getting all financial advice and direction. Specifically, you need to know what that person’s credentials are, and what role he or she will be playing in advising you. Ask that person directly, before jumping into any significant decision or commitment.

You can’t always trust the person giving you financial advice. You must consider whether the recommendations being made are truly net beneficial to you, or whether they benefit the advisor’s financial self-interest. That is, are commissions driving that person to make the recommendation? To understand the role of the person you’re hiring to advise you, you need to understand which financial professionals are legally responsible for representing your best interests. That includes having an understanding of both the parties which are held to high professional standards as well as the multitude of deceptive marketing practices that are common in the financial world.

Fiduciaries are Legally Bound to Represent Your Best Interests

Is your advisor subject to the laws and responsibilities of a fiduciary? Fiduciary responsibility means that the advisor is legally required to put their clients’ best interests ahead of their own when making recommendations. A fiduciary is held to a higher standard than other financial professionals; they are liable, regulated and required to meet more stringent disclosure requirements, and to exercise prudence and care, act in good faith and conduct thorough due diligence in providing all financial advice. Unfortunately, it is estimated that only 10–15% of “financial advisors”—as they market themselves—have true fiduciary responsibility. Telling you that they are looking out for you does not necessary make it so. Not all financial advisors are the same when it comes to the services they offer and the financial advice they give you.

Is Your Advisor a Registered Investment Advisor?

Start by asking your advisor whether he or she is a registered investment advisor. This means that the person is registered with the state regulatory agency or the Securities and Exchange Commission (SEC), which holds registrants to the highest standard of fiduciary responsibility. You may also want to ask about your advisor’s depth of financial planning knowledge and whether he or she has experience with the type of needs and financial advice issues that concern you. For example, if you’re exploring options for in-home care, assisted living or skilled nursing home care, ask how much experience your advisor has in eldercare matters.

You may be surprised to learn that the 85–90% of “financial advisors” which are non-fiduciaries include stockbrokers, bankers, insurance agents, and many other representatives of financial products and services from a variety of industries. They are subject to less regulation. If you are working with a non-fiduciary financial advisor, the question you need to ask is: to whom are they legally responsible—their company, the product company, or you? Make sure you understand whose interest is at stake when your advisor makes a financial recommendation. How does your advisor benefit from the outcome?

As a result of a court ruling in March 2007, the SEC’s position now clearly delineates the differences between those who are fiduciaries and those who are not—including the compensation for financial advice issues. However, it has also resulted in less stringent regulation for many financial “advisors, consultants, agents, counselors” and other deviations of marketing titles meant to entice the consumer. You might notice that many professionals will no longer tell you they are financial planners, as claiming that title implies that they have specific expertise and are required to objectively make recommendations which are in your best interests.

Evaluating the advisor’s capabilities and the potential benefits to you involves more than simply establishing that person’s legal liability and adherence to stringent regulations. Experience, education, knowledge, resources and personal character all inform the value of the guidance given to you. Your trust must be based on something more than just marketing jargon and promises.

Consumer financial abuse is increasing significantly with more creative, deceptive financial advice products being marketed to seniors. Some of these products being sold by a variety of financial professionals are marketed as a panacea for present retirement needs without divulging the true costs and potential impact to the clients. What is very scary is that most consumers of these financial instruments—as well as the parties who sell them—do not understand the true financial ramifications that are involved, which means that the detrimental impact may not be known until long after the sale. I love that there are new options available, but professionals need to be clear about the net cost of the products over time, and how these truly measure up to the benefits they are promising.

My theory is this: most financial products have a time and a place when they’re right for some people. But it can also be like trying to fit your feet into expensive shoes that you don’t need or can’t fit. Make sure you advisor knows the financial products that are available, knows what all of the options are and knows what will fit your situation the best. Make sure your advisor is legally bound to incorporate your best interests into his or her recommendation. This includes considering the total costs of the choices they recommend to you as compared to the total costs of the competitive instruments available in the marketplace.

Understand How Your Advisor is Paid

It is important you understand your advisor’s method of compensation. That is, will he or she be rewarded with a commission for making a particular recommendation? Other alternatives to commission-based compensation include:

• Flat fee for services
• Fee-based management (includes a percentage of assets)
• Hourly rate

The compensation issue has long been a contentious one, but the most important question to ask is this: do the advisor’s recommendations benefit you or someone else? Is there any conflict of interest regarding the financial advice recommendations? If so, has the advisor disclosed it, honestly, clearly and completely, including what the true cost to you might be? Please also keep in mind that you can’t expect someone to work for nothing; the fee structures detailed above are simply other alternatives to working on commission. The real issue is where your advisor’s interest lies. Before establishing or continuing a relationship with a financial advisor, find out whether that person is a fiduciary and what his or her background, knowledge, education, expertise and credentials are, so you can understand how they fit into your financial picture.

Next time I will explore this topic a little further, discussing professional designations, credentials and titles, and explain what they mean in the financial industry—and more importantly, what they mean for you.

Posted in Advanced Planning, Financial Planning for Retirement, Finding a Financial Planner