I recently found myself in a conversation with the parents of a good friend of mine. This is a family I have known well for many years. They are, of course, aware of my profession, but we have always kept things casual when it came to “business talk.”
In this case we stumbled into a conversation about the markets, which naturally lead to discussions about their financial advisor. They were mentioning that they had been seeing headlines about the market recently and that they should “give him a call to see what he thinks about it.” They then went on to say that they think he does a good job for them but that they weren’t really that sure. I then received an unprompted “Well James, you are a financial advisor, what are the questions we should be asking him?!”
I shot off a couple of standard answers in response to their inquiry, but the prompt stuck with me and led to this blog post. What are the three questions you should ask your current advisor?
Are you currently working with a fiduciary?
If you have spent anytime on my “about page,” you will know that I take the word fiduciary very seriously. A fiduciary relationship, in its most basic terms, is a relationship in which the advisor is legally obligated to act in best interest of their clients in every aspect of decision making. Sounds pretty obvious, right? Unfortunately, many families are under the (implied) impression that their advisor is acting in a fiduciary capacity; that they are making every decision in the client’s best interest, only to later find out that is not the case. Brokers, which many of which call themselves advisors, resist entering into a fiduciary relationship since it is the highest standard of care which would require substantial changes to their business. Most advisors, or brokers, work under the “suitability" standard. As it sounds, their recommendations are simply required to be “suitable” in a given moment in time. Whether or not whatever they are recommending is the best for a client is, unfortunately, not a required consideration which can lead to potential conflicts of interest. Advice in that type of relationship is actually considered to be “incidental.” You want to be sure that you are working with an advisor who adheres to the fiduciary standard.
Are you working with an independent advisor?
Second in importance to working with a fiduciary is working with an advisor who is independent. This is one of those situations where bigger isn’t always better. Working with an independent advisor simply means that they are not affiliated, “tied to,” or working for a large financial institution (think Wells Fargo, Goldman Sachs, etc.) The main benefit of working with an independent advisor is that they have more freedom to keep decisions close to you. As an independent advisor, Clearwater Capital Partners has complete flexibility in how we serve you as a client. Specifically, we can invest your accounts however our Investment Policy Committee thinks best. We have no allegiance or requirements to use specific funds within a portfolio. Unfortunately, there are too many circumstances where an advisor is pushed to use a certain fund family, or meet a specific “sales” goal. An independent advisor does not have to be a point of distribution for financial products. Granted, there are some excellent advisors working for affiliated firms, in fact we’ve hired from amongst them, but the lack of flexibility that comes with the big name, in my opinion, can make it more difficult for them to properly serve their clients. Independence means open architecture, which means flexibility to choose partners and investment products on merit.
What types of Fees are you really paying?
Unfortunately, most investors working with an “advisor” are, to some degree, unaware of the types of fees they are really paying. Typically, they may be aware of what their “advisory fee” may be. That is usually where the conversation ends, but that is not necessarily where the fees end. Many investors are actually subject to something called the “layering of fees,” meaning they are probably paying more for their investments than they might actually be aware. Other types of fees an investor working with an advisor may incur would include fund costs, transaction costs, commissions, and maybe even additional hourly fee’s for financial planning. Typically, we will find this is the case when new clients come to us with legacy assets that are tied up in Mutual Funds or other potentially high fee investment vehicles like annuities. This is one of those cases where investment choice really matters. Take two investments for example, a $10,000 investment in a mutual fund with a 2% expense ratio compared with the same $10,000 investment in an exchange traded fund with a 0.5% expense ratio. If both have gains of 10% in a year, the fund with the higher expense would net $10,800 vs. $10,950 for the fund with lower expenses. That difference compounds over time. Intentionality around building a cost efficient portfolio is a crucial component of prudent investment advice / portfolio management.
While not a exhaustive list, these are some very important questions that you should be asking your financial advisor. At its core, a client should have an open dialogue with their financial planner / investment advisor. At Clearwater Capital Partners we believe that it is extremely important to have this type of transparency with our clients, and for them to be able to answer these types of questions.
If any of this article inspires any questions for you, please feel free to reach out for a phone call.