Having choices creates competition and drives innovation making your life better in many ways. But when finances are the topic, growing choice leaves some people uncertain that they’ve made the right decision.
As we created Brooks, Hughes & Jones we gave a lot of thought to the choices people have in working with a financial professional. One thing that seems clear is that it is difficult for many to distinguish between the different types of brokerage and advisory firms and the different qualifications of advisors.
To provide some perspectives about these issues, here is a summary of the advisor landscape and a list of questions that you might want to ask before you decide to work with a financial advisor.
Choosing an Investment Advice Firm
Many people believe the world of investment advice starts and ends with national firms that spend millions annually on advertising. Most people recognize Edward Jones, Ameriprise, Merrill Lynch, Morgan Stanley Smith Barney, UBS, Wells Fargo Advisors, Mass Mutual, New York Life, Northwestern Mutual and the like. In the South Puget Sound area alone these firms have hundreds of representatives.
Someone who wants a different relationship may consider one of several smaller local firms that run their business through broker/dealers such as LPL, Raymond James and/or a dozen other firms.
Your other option is the independent Registered Investment Adviser (RIA) channel.
There are less than 10 RIAs in the Tacoma area. Two of them do financial planning only and don’t offer investment management.
We chose the RIA business model because of its independence and the requirement of fiduciary standards. As RIAs we must act in the client’s best interest rather than simply meeting a suitability standard for our recommendations. Plus, as an RIA firm, we are compensated with fees rather than commissions generated by transactions.
The Difference in Credentials and Licenses
There are some very good advisors at large brokerage houses and small firms that work with broker/dealers. Some of the advisors in these firms have even earned the CERTIFIED FINANCIAL PLANNER™ or Chartered Financial Consultant (ChFC) designation. Certainly, there are some advisors who have not earned these designations, who do very good work for their clients as well.
But if you’re looking for a filtering mechanism to help you decide which advisor or firm to work with, the designations are a clear separator.
Obtaining the CFP® designation requires you to pass seven classes and an exam that covers an array of financial planning topics including retirement planning, investment management, estate planning, taxation, employee benefits and the foundational aspects of thorough financial planning. According to the CFP board, the average CFP exam participant spends at least several hundred hours just preparing for the exam. Through July 2009, 85,253 people in the U.S. took this exam. The pass rate is 57%.
By contrast, the FINRA Series 7 exam, which almost all brokers have passed, covers transactional functions of trading a variety of securities, investment evaluation, account opening and management as well as regulatory issues. It is not a measure of broad financial planning or even thorough retirement planning. It’s a tough exam but it requires a few weeks of diligent studying and memorization.
Advisor Questions
Many people aren’t sure what types of questions they should ask of financial advisors that they are considering working with. We have found “the more the merrier” when it comes to information about an advisor. Here’s a list of questions that you might ask an advisor before making your decision:
Do you offer thorough financial planning or only investment management?
- How are you compensated (fees or commissions)? What are the costs of investment management and financial planning?
- Will you accept a fiduciary responsibility to act in my best interest?
- What licenses and/or designations have you earned?
- How do you determine the right investment strategy for a client?
- What are your core beliefs about managing money?
- What criteria do you use for selecting investments? How do you conduct research?
- How often would you review my investments and my goals?
- What type of communication will I receive from you and your firm?
You can access a deeper checklist of questions here: http://www.cfp.net/learn/knowledgebase.asp?id=8
To learn more about registered representatives of brokerage or insurance-based firms, use the Broker Check tool at http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/index.htm. Here, you can find employer history, licenses held and whether or not the advisor has infractions or lawsuits on their record.
To research Registered Investment Adviser firms, visit http://www.adviserinfo.sec.gov/IAPD/Content/IapdMain/iapd_SiteMap.aspx.
If you have questions, please contact us at 253.534.8888 or info@BHJadvisors.com.
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The Fiduciary Debate: Does Your Advisor Act in Your Best Interest?
Part of the recently signed financial reform bill addresses the fiduciary standard and how it applies to financial advisors.
Currently, Registered Investment Adviser (RIA) firms (like Brooks, Hughes & Jones) are obligated to act as a fiduciary. This means we must make recommendations and provide advice that is solely in the client’s best interest.
Many other advisors, primarily employed by brokerage firms that spend billions on advertising and lobbying –Merrill Lynch, Morgan Stanley, Edward Jones, etc. – currently have to meet only a suitability standard. This means that products they sell should be suitable for the client, given known information about the client. But they don’t have to be unquestionably in the client’s best interest.
The House of Representatives version of the financial reform bill required all financial advisors to operate from the fiduciary standard. Under heavy influence, however, it was amended before signing. What is written into the bill is the authority for the Securities and Exchange Commission to apply the fiduciary standard to all, but not until the SEC completes a six-month review of the subject.
Since Congress failed to fully approve the fiduciary standard, it’s not hard to imagine brokerage firms successfully lobbying the SEC to maintain status quo.
When this study is completed, the SEC will be able to draft its own rules around who is required to act as a fiduciary. As it stands now, brokers would have a two-tiered fiduciary responsibility. If they provide specific, personalized advice, they would have to act as fiduciaries. After they provide this advice, they will no longer be fully subject to a continuing standard in future investment recommendations. This means that a broker’s allegiance could change depending on the situation.
In the current bill, the SEC may also allow brokers to sell a limited range of products (even proprietary) provided they give notice to the customer and obtain consent or acknowledgement.
What it comes down to is paying an investment advisor or financial planner for advice or paying a registered representative to sell a suitable product. The difference may be subtle to most but represents a substantial difference in independence, objectivity and understanding of whose side the “advisor” is really on.
There are certainly many good financial professionals who work for wirehouse brokerage firms. And there are RIAs and CFPs who have done wrong. However, given the opportunity to work with the highest standard of stewardship for your life savings, you may want to consider the meaning of the word fiduciary and look for an advisor willing to operate from its definition in all matters.
We’ll closely follow the SEC’s six-month review and follow-up then.
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