By Steve Doster
[Editor’s note: this is part one of a two-part series on financial advisors.]
It seems like everyone wants to be your financial advisor. Banks, insurance companies, brokerage firms, and mutual fund companies — they all would like to manage your portfolio and deepen their relationship with you. The big question is, should you hire these companies as your financial advisor?
The quick and short answer is no. Financial advisors at these companies are not required to operate under the fiduciary standard. A fiduciary is a professional who is required by law to put the clients’ best interests first at all times. Financial advisors who follow a fiduciary standard must disclose any conflict of interest (or potential conflict of interest) to their clients before and throughout their relationship.
That may come as a surprise to many of you. Financial advisors at banks like Chase, Wells Fargo, and Bank of America can recommend investments and products that earn your advisor a bigger commission rather than recommend what is best for you. Financial advisors at large brokerage firms like Fidelity and Schwab are not required by law to recommend what is in your best interest as a client. Financial advisors at insurance companies like Lincoln Financial or Prudential can sell you expensive variable annuities even though low-cost mutual funds are much better for you.
That is a big list of companies that should not be your financial advisor. So, who should be? You can start your search by finding financial advisors who act as your fiduciary. The legal term for these advisors is called Registered Investment Advisor (RIA). RIAs are held to a fiduciary standard of care. By law, they must act solely in your best interest.
You can find RIAs at the website for the National Association of Personal Financial Advisors (NAPFA.org). This is a nonprofit organization promoting fee-only advice where consumers can find financial advisors who adhere to the fiduciary standard and will not sell consumers expensive and unnecessary financial products and investments.
This website also has excellent resources for consumers like a Financial Advisor Checklist. This checklist has 25 questions you can give to potential advisors before deciding to meet with them. These questions reveal an advisor’s experience, how they get paid, and what services are provided. Also included is a Fiduciary Oath for the advisor to sign. If they won’t sign this, do not work with them! If your current advisor won’t sign the Fiduciary Oath, it’s time to find a new financial advisor.
Once you have your final two or three potential advisors, you can send them the Financial Advisor Diagnostic. Compare their answers to the “answer key” provided by NAPFA. This pamphlet is written in a straight-forward way that makes it a valuable tool to use in your search. Download and send this diagnostic tool to your current financial advisor. You may be shocked at the responses you receive.
Everyone wants to be your financial advisor, but not everyone should be. Before saying yes, confirm they are legally held to the fiduciary standard. That is the most important factor in selecting someone to work with. Next month, we will dig into more detailed criteria and the value you receive in working with a financial advisor.
[Image provided by canstockphoto.com]
— Steve Doster, CFP is the financial planning manager at Rowling & Associates – a fee-only wealth management firm in Mission Valley helping individuals create a worry-free financial life. Rowling & Associates helps people with their taxes, investments, and retirement planning. Read more articles at rowling.com/blog.