There is probably nothing (Except poor personal money management) that costs the majority of uninformed clients more than poor advisory management. Even worse than a poor investment decision which normally affects an investor once, poor management hurts on an ongoing basis. Management fees normally increase with the increase in dollars invested (Assets Under Management.) Advisors would argue that their percentage charged to the client decreases as the portfolio size increases, but the dollar amount of advisory fees normally increases as the portfolio grows.
Many, many people pay many thousands of dollars in unnecessary fees, commissions, costs, and management fees levied by less than honest advisors. These “dollar gobbling” actions are the main reason why advisors have a less than stellar reputation among the general public. Human nature dictates that some advisors will benefit themselves above the benefit to clients when placing them in high fee and high commission products, funds, or A.U.M. (Assets Under Management) contracts that, although suitable, are not in a client’s best interest. (More on that subject in a minute!)
Unless you can tell the difference between and understand the meaning of CFA™, CFP™, CIC, CHFC™, CFS™, CIMA™, CMT™, CPA, CLU™, RR, IAR, ARM™, AINS™, API, PCIA, CRPC™ CPCU™, CRM, CPWA™, and CTFA (To name a few) designations, your financial health may be in jeopardy!
First, it’s important to remember that the vast majority of Financial Advisors are hard-working professionals whose main focus is achieving financial independence and stability for their clients. But, the services provided and fees charged can vary a great deal! (If two advisors charge the same fee for managing assets, but in addition to portfolio management the second advisor also provides retirement planning, tax planning, budgeting information, etc. one could argue that the first advisor is overcharging the client for the amount of service provided.)
It is also important for consumers to remember that no one is going to take better care of us than us. It is imperative to keep this in mind when searching for an advisor that will offer the best value and services for the money that will be spent.
At Retiring With Enough I have constantly stated that I will try to simplify complex life problems. One of the biggest and most complex is the myriad of advisor designations, what they represent, and how they affect your finances.
Or more easily stated:
The person that you are entrusting with your financial well-being may not be a fiduciary advisor. A fiduciary financial advisor makes investment decisions with your best interest in mind, while a financial advisor who isn’t a fiduciary may recommend products for which they receive a commission or other form of payment. Does this mean that all financial advisors are not acting in the best interest of their clients? Not! Your job as the CEO of your retirement plan is to find the most suitable advisor that fits your needs.
I am not going to explain all of the ins and outs of each professional designation and how you, as a consumer, are affected by each. The easier solution to this complex and potentially expensive problem is for each person to verify whether their financial advisor is a fiduciary financial advisor.
In financial planning, the plans and financial products provided to consumers can be fiduciary or suitability based. This is a critical concept to understand and master. It provides the basis for ALL actions and transactions of advisors.
*A true Fiduciary Advisor must always act in a client’s best interests and provide that client with the most appropriate investment products and services.
*An advisor that is not a true Fiduciary Advisor can hold some of the above-stated designations; but is legally bound to only provide a suitable investment (Which may or may not be the most appropriate investment and normally provides commissions and financial incentives to the advisor.)
A real-world example would be an advisor who recommends an annuity to a client with limited finances. The annuity will provide a generous commission to the advisor, and may be deemed suitable for the client. But, it may not be the most appropriate use of the client’s available funds.
The advisor is not acting in a true fiduciary capacity and has provided a suitable product, not what is in the client’s best interest. The advisor has not broken any law because he provided a suitable investment and is not a true fiduciary. A true fiduciary advisor could not recommend an annuity to this same client without breaching fiduciary responsibility and possibly facing legal problems.
The solution:
*Before engaging any advisor make sure that they will act in a fiduciary capacity in your best interest and that they will state their fiduciary status in written form.
*Ask any current advisor for a written confirmation that they are acting on your behalf in a fiduciary capacity. If the advisor is unable or unwilling to provide written confirmation, then they are most likely not a true fiduciary advisor. This advisor is most likely providing suitable (though probably not most appropriate) investment advice and products. A verbal statement may be binding but is not as strong as a written fiduciary statement.
Although verbal fiduciary agreements may be legally binding, a fiduciary statement in written form is much stronger and should state that the advisor is a fiduciary advisor and is acting in a fiduciary capacity on your behalf 100% of the time. (A novice or beginning investor should always make every effort to engage a fiduciary planner. More experienced, and expert investors can work with any style of planner due to a greater understanding of fees and commissions.)
It is important to understand that even advisers who say they are fiduciary advisors may not be acting in your best interest 100% of the time. Some advisors can move between registered advisor and fiduciary advisor status for different transactions. In addition to having a written statement, it is critically important that the written form state that they are acting in a fiduciary status 100% of the time.
My next post will explore the different types of financial advisors and how they are compensated.
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