By George M. Smith
In the 2018 edition of Vanguard’s whitepaper, The Evolution of Vanguard Advisor’s Alpha: From Portfolios to People, the writers state that “…investors are more interested than ever in knowing whose interests their advisor is working for, as well as how their advisor is paid for services.”
This quote is relevant in light of several recent headlines.
- Beilfuss, Lisa. “Merrill Brokerage Team Leaves to Set Up Independent shop” – Wall Street Journal March 2018.
- Paikert, Charles. “Why are so many advisors switching firms?” – Financial Planning Magazine April 2018
- Levaux, Janet. “Edward Jones Sued Over Alleged Fee-based ‘Churning Scheme’“ – Think Advisor April 2018
- Waddell, Melanie. “SEC Clams PNC, Securities America, Geneos With $1.5M Fine Over Share Class Violations” – Think Advisor April 2018
The common theme of these articles boils down to the underlying culture of the firms mentioned. Whether you realize it or not, when working with an advisor you are, in fact, working with both the advisor and his/her firm and are directly exposed to the firm’s culture. This is important as it is next to impossible to for an advisor to be independent of the processes, procedures, personalities and expectations of the company for which they work. These influences may determine the products you are sold, the services you are or are not offered, the costs you pay, and more.
If the advisor is selling you something for a commission then they are operating under the suitability standard and, by extension, they represent their firm’s interests and not yours. This may happen even if you have a fee-based account with that firm.
When you summarize these articles there are a few themes that stand out, and one that does not.
- Advisors are leaving larger firms to join or start independent firms with “a desire for growth opportunities, greater autonomy and ability to deliver a higher level of service.” In other cases, departing brokers “said their move was prompted by a desire to offer clients a broader array of financial planning services and investment products without also needing to cross-sell products offered by the bank [emphasis added].” In other words, they got tired of being pressured to sell things that they didn’t want to sell and what most clients didn’t need or want.
- Inevitably, proprietary products come into play. If a firm does not intend on using and profiting from products and strategies they create then why waste the time and effort to create them? This is not to say that all of these products are garbage, but there are many potential issues that may come with the use of “in-house” funds. Ken Hawkins of Investopedia wrote a good article on this in February (https://bit.ly/2H8LVut).
- Higher cost, revenue-sharing mutual fund shares are being used when lower cost, non revenue-sharing funds, are available. This is a breach of fiduciary responsibilities.
- According to Think Advisor, the co-director of the Securities and Exchange Commission’s Enforcement Division said at the SEC Speaks conference that “investment advisors putting their clients into higher fee share classes when lower costs ones are available “is a widespread problem.”” (https://bit.ly/2HGUMVr)
- All the firms referenced are brokerage firms where the majority of revenue is derived from commissioned-based products. These firms happen to also offer fee-based accounts, but they are not to be confused with fee-only firms.
- Planning is not the focus – selling is. All of these issues are based on selling you something versus helping you accomplish your goals and addressing your concerns. Selling tends to ignore the importance of understanding who you are as a person and what is important to you. It is devoid of objectivity, and it increases the odds that your interests are second, or even third.
- You may have the best performing investments in the world, but it still may not get you there. You may even realize profits and at the same time possess little confidence about your future.
The good news is that there is an alternative. If you are looking for something different or are unhappy with where you are, take action. One way to start is to work with an advisor or firm that does not have these conflicts of interest, and if they do have conflicts they are discussed and disclosed openly using simple language. You are more likely to experience this through an independent, fee-only firm that focuses on planning. Keep in mind that a lot of folks do investment management, and some better than others. To be clear working with a fee-only fiduciary includes firms that can help you with every aspect of your financial health and not get paid extra for it. This would include things like insurance or annuities. To find a fee-only firm or advisor in your area go to www.napfa.org.
Once you have narrowed down your search, make a commitment to take control of your future. You have the right to ask any question you want. Seek to understand more than just what an advisor charges. While you certainly need to know that you also need to know what you will get for it. Ask about their education, employment history, planning philosophy, investment philosophy and personal interests. If you are afraid to ask a specific question then that’s the one you should definitely ask. It is supposed to be about you.
As an example, when a prospective client comes to Smith Bruer Advisors we show them a layout of our wealth management process, an example of the planning documents we create, and the on-going service they should expect. We disclose our fee schedule, the investments we use – as well as the cost of those investments, and we introduce how our technology works and benefits them. We want to get to know our clients and for them to know us. But, that’s just us.
In general, when comparing a brokerage-based firm to an independent fee-only firm acting as a fiduciary at all times, you may experience better service, better technology, lower costs, access to a broader array of products, and increased transparency. Imagine how much better you would feel about your goals, your needs and your future.
I’ll leave you with one clue for when you are looking for a difference that matters. If strategies, products or ideas are discussed before seeking to understand you and your priorities, then there really is no difference, and it definitely is not about you. Once you experience wealth management from an alternative perspective you will see the difference it really makes.
Smith Bruer Advisors is a fee-only, fiduciary Registered Investment Adviser (RIA) base in Tallahassee, Florida