by Richard Rosso, MS, CFP, CIMA
“He was annoyed with me after a while. He said I asked too many questions.”
It’s tough for me to imagine speaking these words to a client or anyone seeking guidance.
I don’t have the guts. Or the hubris.
Or the stupidity.
I wonder about (and I’m thankful) for complacency among some advisers. It allows me to continue to gain thoughtful, inquisitive clients who never feel that I’m annoyed by a passion to learn.
The noblest efforts we undertake as trusted financial partners are to listen, answer questions, validate good behaviors, empower improvement and communicate effectively to our audience.
How does a prospective client – One who has a genuine curiosity in her finances, a successful saver and investor, ask “too many questions?”
If you’ve been with an advisor long enough to feel comfortable together, or maybe you’re exploring a new financial relationship, asking questions should be encouraged.
There’s no such concept as “asking too many questions.”
You query enough to satisfy your need for information requested. I’ve noticed how the more self-aware an individual is about their financial situation, the more questions that arise.
There’s no reason to feel intimated or stifled.
You’ve earned the right (and the money).
Frankly, investors are not inquisitive enough.
It’s time to ask the five questions: It would be a mistake not to.
Are you a registered investment adviser or a stock broker?
There’s a difference. A big difference. When people ask me I respond: “Well, I don’t really want to help you break anything. Most likely, I’m going to help you mend something a broker, broke.” You need to ask the question and comprehend the difference.
A registered investment advisor or “RIA” is held to a fiduciary standard. According to www.thefiduciarystandard.org, a committee of investment professionals and fiduciary experts who formed in June 2009 as advocates for fiduciary-level advice:
“Registered representatives of broker-dealers are subject to a suitability standard under the Securities Exchange Act of 1934, while investment advisers are regulated as fiduciaries under the Investment Advisers Act of 1940.”
What does that mean to you? Plenty.
Fiduciaries are held to a high standard of ethics and care which affects all the advice they provide. It’s a much stricter standard. There should be no conflict of interest and if one exists, it requires clear disclosure.
The Committee for the Fiduciary Standard outlines 5 core principles of a fiduciary:
- Put the client’s best interests first;
- Act with prudence, that is, with the skill, care, diligence and good judgment of a professional;
- Do not mislead clients–provide conspicuous, full and fair disclosure of all important facts;
- Avoid conflicts of interest;
- Fully disclose and fairly manage, in the client’s favor, unavoidable conflicts.
“Suitability” guides a broker to recommend an investment that is appropriates for your situation, is not held to the same standard. A broker is required to know your risk tolerance, tax bracket, and time frame for the money you seek to invest. All skeletal in nature. Yet legitimate. Well, it’s suitable.
Feels like something is missing, doesn’t it?
My belief, based on how brokerage firm compliance departments operate and an unpleasant experience with a former employer, is that suitability has been misaligned to protect the financial organization from lawsuits or arbitrations and NOT designed to safeguard individuals seeking guidance. The Fiduciary Standard is a high calling. It’s there to position the client front and center in the financial advice model, as it should be for every professional who assists consumers with their financial decisions.
On April 6, 2016, the outdated foundation of financial services was slammed and cracked to make ground for hopefully, a safer, increasingly objective industry with the issuance of the Department of Labor’s Fiduciary Rule.
Mind you, it’s the genesis of a higher standard of care for brokers, so there’s much to be accomplished. I expect the Rule will be pushed, pulled, fine-tuned before it fully takes effect on April 10, 2017 and final policies put in place by January 1, 2018. My thought is this will be a continuous work in progress long after 2018. That’s ok. It’s a step in the right direction.
The new rule resurrects the definition of fiduciary from the 1974 ERISA – (Employee Retirement Income Security Act) and expands upon it. ERISA’s fiduciary standard outlines how a retirement plan fiduciary must act prudently and with undivided loyalty to the participants. Obviously, the retirement landscape in 1974 was very different. The 401(k) plan wasn’t in existence. Defined benefit plans, or pensions, were the most popular retirement vehicles.
Crucial elements of the rule – advice provided must be in a client’s “best interests,” full disclosure of conflicts of interest, and charge no more than “reasonable compensation,” for services. Generally, the fiduciary must sign a “Best Interests Contract” with the client that outlines how he or she will provide advice in the client’s best interest.
A broker’s financial institution will also be subject to the rule. Ostensibly, sales quotas, contests, awards or special compensation that may tempt an advisor to stray from his or her fiduciary responsibilities, will be prohibited.
The message is growing strong (there’s a long way to go), to an industry driven by sales pressure: Change your culture. In other words, those ads you run that give the appearance of fairness, caring and client first that not one consumer takes seriously? Make them reality, not fantasy.
Ethical employees who serve financial clients in publicly traded brokerage firms are torn between serving clients holistically for the long term and at the same time are up against the wall every quarter, starting from scratch, to meet outrageous quarterly sales goals and tremendous pressure to sell the hot product of the day (these tactics still exist). The internal friction can generate great turmoil and perhaps push an employee to make sales first and fail to responsibly counsel.
The mixed message from senior corporate puppets to do what’s right for a client and oh, meet big sales targets (or you’re out), builds conflict and distress. Talented workers become discouraged, burned out and move on. It’s an ancient business model. Change is required and it appears to be coming.
Slow is better than no.
Unfortunately, the recent ruling only covers retirement accounts. For now. The Security & Exchange Commission is expected to release a fiduciary standard in 2016 which would cover fiduciary responsibilities for taxable brokerage accounts. Although a uniform fiduciary standard (with the DOL), would be welcomed, it’s too early to draw any conclusion that this will occur. Nor is there any assurance that the SEC will adhere to an October release.
While the Feds work to figure it out, ask the question. Keep in mind, not every professional you engage will operate in a fiduciary capacity regardless of federal rulings. My suspicion is you’ll be hearing interesting, articulate, creative responses but not a clear “yes” or “no.”
Based on the answers received, you’ll gain valuable perspective about what’s best for you and your family’s finances.
How much will I pay for your services?
Simple question deserves a simple answer. Unfortunately, not so simple. People share with me their frustration as they’re unclear how their current financial professionals get paid or are compensated for selling investment products.
It’s especially perplexing for mutual fund investors sold multiple share classes and perpetually unclear of how charges are incurred. A clear comprehension of the class share alphabet (A, B, C), is as thick and jumbled as the inside of Campbell’s Soup can.
B & C share classes are popular selections on the product-push list. They represent the finest alchemy in financial marketing. As consumers are generally hesitant to pay up-front sales loads like in the case of A shares (even though when taking into account all internal fees and expenses, they’re the most cost-effective choice for long-term investors,) B & C shares were created to mollify the behavioral waters.
To avoid having a difficult conversation or facing reluctance about opening your wallet and shelling out 1-4% in front-end charges that reduce the principal amount invested, the path of least resistance is to offer share classes with internal fees, marketing charges and deferred sales charges. Either way you pay. With B & C shares generally, you pay more. However, big fees reduce returns, they’re stealth. Thus, they feel less painful to invest in (even though they’re not).
Frankly, the only funds worth considering are no-load mutual funds where you can purchase or sell anytime without a commission or sales charge. Avoid the A, B, C’s all together. Meet with an hourly-fee based Certified Financial Planner or a fiduciary to help you assess your current mutual fund holdings and for recommendations based on your personal situation.
A financial professional may be compensated hourly, by annual flat fee, a percentage based on assets under management, commissions or perhaps a combination. Regardless, to make an informed decision, you must understand how your advisor puts food on the table. If you can, get it in writing.
There’s no ‘right way’ to be compensated as long as it’s fair and reasonable for services rendered. You also want to understand what motivates your broker or advisor to recommend investment vehicles. If you’re not getting straight answers, well you know what to do. Move on.
How do you incorporate my spouse, life partner and children when it comes to planning for me?
You don’t exist in a vacuum. An advisor should maintain a holistic approach to financial planning and that includes communicating with loved ones and teaching children how to be strong stewards of money. The meetings, communication must be ongoing. At least annually.
Why did you select financial services as a career?
I recall vividly how the stock market intrigued me through my teenage years. I never missed an episode of Wall Street Week. As early as 13 years-old I was fascinated with how markets worked. In grade school I enjoyed helping classmates understand how our passbook savings accounts (and compound interest) worked. Every Wednesday, a bank representative from Lincoln Savings Bank would meet with our elementary school class and collect deposits and stamp our passbooks.
This question should be used to gauge a perspective financial partner’s penchant for helping others and passion for his or her role as a mission, not a job. How do you know whether a professional sincerely cares about your financial situation and goals? You’ll know it, intuitively.
What are your outside interests?
A successful life is about balance. This question gets to the weekend and evening person behind the financial professional you observe from behind a desk, charts, book, and computers. You may discover activities you have in common and develop rapport on a personal level. To gain a complete picture of the kind of person you’re entrusting with your investments is a crucial element of your interviewing process. By the way, it’s not prying. It’s curiosity. Ostensibly, you should like the individual you and your family may be working with for decades.
Questions are an integral part of any relationship.
As a friend recently taught me – not asking them in a timely fashion can create resentment and anger.
You’re not being nosy.
You’re not a nag.
You’re seeking information to make an informed decision.
About a topic close to your heart.
No questions asked.
Richard Rosso, MS, CFP, CIMA
Richard Rosso is the Head of Financial Planning for Clarity Financial. He is also a contributing editor to the “Real Investment Advice” website and published author of “Random Thoughts Of A Money Muse.” Follow Richard on Twitter.