How can you be confident that your advisor is acting in your best interest?

The best interest standard is what’s called a fiduciary standard. It is the strongest legal responsibility one person or firm can have to another financially; it means you have to act solely in the clients’ best interest. The best interest standard is more on the fee-based side, where advisors like myself charge either a fee or a percentage for assets under management, receiving no commissions on securities transactions.

Now, there’s another standard in the financial industry called the suitability rule. This rule applies more to the commission-based, kind of traditional stockbroker side. Broker-dealers only need to make suitable recommendations for clients, but not recommendations solely in the best interest of clients. A lot of advisors work in both environments, which I think seems very inconsistent and hard to separate, creating tremendous conflicts.

As you may be aware, the fiduciary rule from the Department of Labor that was issued under the Obama administration has now been officially defeated in the courts. In my view, this really should be the SEC’s jurisdiction, and the Department of Labor was pretty onerous in how it would actually read legislate that.

Regardless of what the law says, though, there’s plenty of people throughout the last few years that technically were supposed to be acting in a fiduciary capacity and instead robbed their clients. Bernie Madoff was regulated as a fiduciary, yet he clearly did not act as a fiduciary, he was in name only.

Senior couple with financial advisorPutting investors first should be the objective. This should be done in a real world where conflicts of interest exist, but where clients should have the control over their assets and those conflicts. Making all intermediaries act as fiduciaries will not guarantee, in my opinion, better outcomes or more choices for retirees. The suitability standard, absent substantial improvements, is not nearly enough. We need to capture the spirit of improved outcomes for investing by raising standards, but not by eliminating options for you as an investor. The SEC has a proposal on the table that sends a clear message to the industry that we need to improve, we need to better inform, and we need to mitigate conflicts of interest.

Bottom line, though, is how do you know your advisor is working in your best interest, regardless of whether the name says best interest or suitability? I think the best way to really get a sense for that is how that advisor engages you. When you go into see an advisor for the first time or when you’re meeting with an advisor over time, is the focus based on the outcomes you want to achieve with your money and the process of how you get there? Or, is the focus on a product that is an “end-all-be-all” to help you get there?

We Can’t Predict the Future

No product is going to be a perfect answer. We have to utilize a lot of different strategies and combinations in order to accomplish goals because there are competing objectives in our financial planning. For example, everybody wants to make money, but nobody wants to lose money. That makes investing a classic balancing act of risk and reward. It is about mitigating risks to achieve your desired outcome, which can be inherently competing and conflicting. We should not be investing just to make money, because nobody knows where we can make the most money.

Magic crystal ballWe don’t know the future. Nobody does. Nobody has a crystal ball, or at least no one has a crystal ball that works. I’ve been asked, “What do you think the markets are going to do this year?” a lot. I used to always jokingly respond that I once had a crystal ball, but it didn’t work. So, about five or six years ago for Christmas, my staff gave me a crystal ball that now sits in my conference room because of my joke about it. But it still doesn’t work. Nobody knows what’s going happen. I don’t care how many degrees or letters there are beside someone’s name, they still can’t accurately predict what’s going to happen. Therefore, we don’t know where you can make the most amount of money. We don’t know if the bond market is going to crash. We don’t know when the next bear market is going to happen. We can talk about the likelihood of these things, but we don’t know for certain.

What do you need your money to do for you?

All we as advisors can do is come up with a plan that helps you reach a desired outcome. What is it you need your money to do for you? And so, when you’re working with someone, the focus should be on you and the process is to get you where you want to be. If you go in for a meeting with an advisor and it’s all about selling a product, then I would question, “Is it in your best interest?” I’m not saying it’s not for sure, but that would raise red flags to me.

Middle-aged couple planning for retirementI think it’s how your advisor engages with you. Is the advisor talking to you in more of a consultant-type role, so that when they speak with you it’s almost like they’re your copilot and consultant and they have that hat on? Or do they sound more like a salesman, trying to convince that you need this particular product, this mutual fund, this stock, or this annuity? To me, evaluating how an advisor engages with you is key to getting a clearer picture of whether he or she is working in your best interest.