We have written before on the Department of Labor (DOL) fiduciary rule, which was proposed by the Obama administration to increase transparency and investor protection. This rule was intended to require all investment advisors to be subject to a fiduciary duty, putting clients’ interests before the interests of the advisor and/or his firm. The rule is only partly in effect now and the DOL has recently proposed a delay in full implementation until 2019. So, while it makes a great deal of sense to require advisors to adhere to a fiduciary standard, it remains the investor’s job to make sure he knows the sort of advice that he or she is receiving from his or her advisor. (See our previous article describing the difference between fiduciary advice and suitable advice by clicking here.)
Questions to ask your advisor
Since investors may still need to take matters into their own hands to know the level of responsibility to which their advisor holds themselves, we suggest the list provided in this recent article. Author Jason Zweig has written an article in the Wall Street Journal titled, “The 19 Questions to Ask Your Financial Advisor.” If you are a subscriber to the Wall Street Journal, you can read the article by clicking here. (There is paywall if you are not a subscriber.) However, we have listed Zweig’s 19 questions below, along with Zweig’s preferred answers to the questions.
1. Are you always a fiduciary, and will you state that in writing? (Yes.)
2. Does anybody else ever pay you to advise me and, if so, do you earn more to recommend certain products or services? (No.)
3. Do you participate in any sales contests or award programs creating incentives to favor particular vendors? (No.)
4. Will you itemize all your fees and expenses in writing? (Yes.)
5. Are your fees negotiable? (Yes.)
6. Will you consider charging by the hour or retainer instead of an annual fee based on my assets? (Yes.)
7. Can you tell me about your conflicts of interest, orally and in writing? (Yes, and no adviser should deny having any conflicts.)
8. Do you earn fees as adviser to a private fund or other investments that you may recommend to clients? (No.)
9. Do you pay referral fees to generate new clients? (No.)
10. Do you focus solely on investment management, or do you also advise on taxes, estates and retirement, budgeting and debt management, and insurance? (Here the best answer depends on your needs as a client.)
11. Do you earn fees for referring clients to specialists like estate attorneys or insurance agents? (No.)
12. What is your investment philosophy?
13. Do you believe in technical analysis or market timing? (No.)
14. Do you believe you can beat the market? (No.)
15. How often do you trade? (As seldom as possible, ideally once or twice a year at most.)
16. How do you report investment performance? (After all expenses, compared to an average of highly similar assets that includes dividends or interest income, over the short and long term.)
17. Which professional credentials do you have, and what are their requirements? (Among the best are CFA [Chartered Financial Analyst], CPA [Certified Public Accountant] and CFP, which all require rigorous study, continuing education and adherence to high ethical standards. Many other financial certifications are marketing tools masquerading as fancy diplomas on an adviser’s wall.)
18. After inflation, taxes and fees, what is a reasonable estimated return on my portfolio over the long term? (If I told you anything over 3% to 4% annually, I’d be either naive or deceptive.)
19. Who manages your money? (I do, and I invest in the same assets I recommend to clients.)
If we can help you with your understanding of these questions or the fiduciary role in general, please contact us.
Horizon Advisors is a Houston based fee-only wealth management firm. Horizon is a fiduciary advisor. We specialize in helping successful individuals and families understand, organize, and manage their often complex financial situations. Horizon offers integrated financial planning and investment management services.