Hello from Pam

Pam Krueger / March, 2019


Thanks for watching our show! It’s been about ten months since the Dept. of Labor’s Fiduciary Rule was killed. That’s the rule that would have required all financial advisers to become fiduciaries— meaning to act in their clients’ best financial interests. As it stands today, only about 10% of investment advisors are held to the fiduciary standard. That leaves consumers completely on their own to figure out how to vet financial advisors before they hire one.

Our audiences have plenty of good questions about how to find a competent, fiduciary, fee-only financial advisor. This is one of the most important relationship decisions you’ll ever make– especially if you’re close to, or already in retirement.

I’ve organized these five key questions with answers to each.

Q: Banks, brokers and insurance companies clearly have conflicts of interest, and yet all advisors say they ‘act like’ fiduciaries. How do they get away with it?

A: There’s absolutely nothing stopping a salesman working at a brokerage firm or insurance company from calling himself a ‘financial advisor’ or even using the label, fiduciary.’ Even advisors who have stupidly obvious conflicts of interest can say they are fiduciaries as long as they disclose their conflicts. There’s no law saying they have to eliminate or even address the issue, but brokers and advisors are supposed to tell you when there’s a conflict. Remember, the primary role of a broker or agent is to sell you investments or insurance policies so the brokerage firm meets their sales goals. Even the most well-intentioned advisor at a brokerage isn’t getting paid to provide comprehensive financial or holistic planning.

Q: How can I know if an advisor is truly fiduciary?

A: Vetting an advisor is an art and a science. There are no short-cuts.  You can ask any advisor if he’ll be willing to sign a fiduciary oath. Most cannot. Investment advisors who are fee-only and registered with either the SEC or State Regulators are independent— in other words, not employed by a broker. I start my vetting by looking up the advisor’s SEC records to understand how the advisor and the firm get paid. A fee-only advisor is more likely to put your best interests first because that advisor is paid by you, not by a brokerage firm. That means he or she works only and directly for you as a true advisor. You can also ask the advisor directly how he’s compensated. If you look at the SEC records and notice there are ties to a broker or insurance company, you’d want a clear explanation of  how much of the firm’s revenues come from client fees directly versus sales kick-backs. A fee-only advisor’s interests align much better with yours.

Q: Does it cost more to use a fee-only fiduciary advisor?

A: No. In fact it costs much less. Typically the all-in fees you pay for holistic financial planning and on-going advice and portfolio management are about half of what you’d pay a broker. The costs associated with insurance products like variable annuities can be literally 10x what fee-only investment advisors charge. Since there is no fiduciary standard for brokers, the expenses you pay for advice from brokers and agents is opaque because the fees are often embedded (aka hidden) in the products or mutual funds so it’s very difficult to know what you’re really paying in commissions and unnecessary fees.

Q: If I check out an independent advisor’s background with regulators, what red flags should I look out for?

A.  Every registered investment advisor must file a full description of their business that includes fee schedules and any ‘disclosures’ such as client complaints or any disciplinary actions. You can and you should look at the background records on file with SEC or state regulators.

There are two big red flags (and lots of small ones). The most critical warning sign of danger is when you look up an advisor’s name and do not find him or his firm listed in the regulator’s database. In that case, go no further. All advisors should be registered and if not, don’t consider working with them. Look at an advisor’s ADV form Part 2. The other huge red flag is where you see him listed as a broker with FINRA and can see the advisor has had disclosures, or complaints from prior clients or brokerage firms. There are many other warning signs you can find in the ADV including high fees. It’s good to use the SEC filings to confirm an advisor really is fee-only, even if it says it all over the firm’s website. It’s all there in the advisor’s records in black in white.

Q: What’s the value of hiring a fee-only, fiduciary advisor?

A: Perhaps you’re doing a great job managing your own finances and investments. The value of working with a professional will be different for each individual. The majority of people who are now five years or less away from retiring are worried about when they can really afford to stop working, if ever. It takes a serious deep dive and true cash flow analysis at that critical point. Once you know how much money you can truly plan to live on, all your decisions from that point can be made with a much better understanding of the implications of each decision you may make. People in their 50’s, 60’s and beyond tend to have layers of assets that have accumulated over time. Not only for themselves but their families— second marriages, inheritances, real estate assets, not to mention 401k’s and IRA’s. Then there are taxes, estate and legacy issues and of course, the actual investing strategy and investments that power that retirement. A truly established, fiduciary advisor brings the expertise and unbiased advice and acts as your advocate. A real advisor is going to want to keep your costs down and be an expert in investments that are efficient and transparent. The relationship with an excellent advisor is likely to include your family and may involve helping to educate your children. (A little financial literacy is valuable in and of itself). The best fiduciary advisors tend to retain their client relationships with very little turnover— meaning 95% of the advisor’s clients stick with them. Those client stay because the services they’re getting are worth the fees they pay.