Posted by jasonzweig on Aug 31, 2017 in , Blog, Columns, Featured |
ImageCredit: Christophe Vorlet
By Jason Zweig|Aug. 25, 2017 5:30 am ET
Getting all stockbrokers, financial planners and insurance agents to act in the best interests of their clients is a struggle that financial firms and their regulators still haven’t resolved. That should be their job — but for now, it’s yours.
The obligation of those who give investment advice to serve clients, not themselves, is called fiduciary duty. That obligation is far from universal and, in some ways, is in retreat.
The U.S. Department of Labor, which last yearreleased a rule requiring brokers getting paid for investment advice on a retirement account to be fiduciaries, isreviewing the regulation. The rule is only partly in effect; the department has drafted aproposal to delayfull implementation until 2019.
Meanwhile, the Certified Financial Planner Board of Standards, which sets competency requirements criteria and ethical rules for the nearly 78,000 certified financial planners in the U.S., isseeking to compel themto act in clients’ best interests “at all times” when “providing financial advice.”
The board’s proposed standards require its financial planners to “disclose and manage” such conflicts as gifts, bonuses or investment choices that can increase their compensation. Planners would also have to provide additional details about how — but not how much — they are paid.
Some brokerage firms warn that they may put their interests ahead of yoursregardless of whether your adviser happens to be a CFP.
Until regulators and trade groups sort this out — andthe next total solar eclipsemay come first — the burden of finding someone who will act in your best interest is on you.
That means asking an adviserthe right questions(and listening for the best answers). I encourage you to clip or print out this column and bring it to your next meeting with your financial adviser.
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 shoulddeny 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 thatincludes dividendsor 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 aremarketing tools masquerading as fancy diplomason 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.)
Are there other questions you would add to the list? Please send them my way at intelligent.investor@wsj.comand I’ll write another column with your best recommendations.
Source: The Wall Street Journal,http://on.wsj.com/2wC3zFk
For further reading:
Definitions of DUE DILIGENCE, FIDUCIARY, FINANCIAL ADVISER, and INDIVIDUAL inThe Devil’s Financial Dictionary
Chapter Ten, “The Investor and His Advisers,” in The Intelligent Investor
On Fiduciary Duty
It’s Time for a Revolution in Investor Disclosures
Financial Advisers: Show Us Your Numbers
