Welcome back.
Last week I re-answered a question I received at the OLLI
class at UNC Asheville. Most of the
attendees were people who make their own financial decisions. Maybe not a brilliant marketing strategy for
HelmsWealth but I love talking about finance and usually learn something
myself. We can swap yarns in good
fellowship because none of us risks our trust.
Before the bell, I said that investors with full-service
financial advisors didn't need to know anything about portfolio mechanics. Instead, they absolutely must answer these
three questions about their advisor:
1) Do I like this person?
2) Do I trust this person? and
3) Will he (or she -- usually he) do what I
need?
You need three confident "yes" answers whether you
are interviewing a prospective advisor or have known him for 12 years. If you get all three right, managing the
money is his job from them on.
After class, I was asked to expand on that statement. I’m glad of the opportunity because it comes
down to the trust I think is the hallmark of the essential family advisor.
"Trust" and "like" are separate
questions for a good reason. When it
comes to money or family, trust is the higher standard.
President Reagan famously said, "Trust, but
verify." Verifying trust with your
financial advisor can be daunting. But
you have to do it. You are the only one
who can. I can't give you much emotional
support from a blog page but I can share some ideas how to start your search.
Investors are between a rock and a hard place. On one hand, Wall Street sells
investments. Sales incentives can
include rewards or pressure depending on how much freedom advisors have to
choose what you own.
On the other hand, financial advisors have an ongoing
fiduciary duty to place their clients' interests above those of their firm.
How your advisor and his firm handle those competing forces
determines where their loyalties lie.
That’s also the easy (and discreet) place to look for
conflicts-of-interest. If you really want
to know where you stand, test the integrity of your advisor's product supply
chain.
My personal favorite fiduciary responsibility is maintaining
the transparency of the investments in my clients' accounts -- both what they
are and how they get there. We shop
hundreds of investment sources using a fee-based platform so none of the
vendors have any economic leverage to force their way into the portfolio.
That's crucial because part of that essential duty is to
intervene in the product flow when I see strategic threats or
opportunities. As things change, there
is always a Plan B without duress from suppliers.
It's not so simple when firm-wide revenues depend on
favoring one vendor. Plan B means a one-sided
talk with your boss about being "a team player". If you distribute for a single-line manager,
Plan B means looking for another job.
Let's do some verifying in your best interests:
Start with the low-hanging fruit. Does your advisor's firm or parent corporation
frequently pay huge fines for stealing?
That's a clue.
Can your advisor only sell (or does he only sell) products
or strategies his company manages?
That's another clue – although not a deal-killer if they're competent.
My big red flag is when advisors are paid to keep you on
their company's glide-path (last week's blog). Funds, wrap accounts, annuities – the platform
doesn't matter if you are just a dot on the chart. Managing one big account is more profitable
than managing 80,000 little ones. That
doesn't mean it's better for you – or even cheaper.
Case-in-point: Last
week I said I think rigid asset models are a strategic threat for retirees when
used instead of on-going vigilance.
I've been wrong before.
Maybe I'm just the only advisor who can't squeeze 6% out of a 3%
bond. Right or wrong, markets create
plenty of other dangers without my help.
When I spot one, I can act without someone breathing down my neck.
If you haven't done the 5-minute exercise at the bottom of last week's blog, please do that now. You need to know your asset allocation before
you ask why you have it.
Innocently ask your advisor how he would change your
investment strategy if he felt you, his portfolio process or even his firm was
on the wrong track.
Then listen. He has
one chance to get this right.
A good answer is that he constantly monitors client
portfolios and chooses investments from independent sources without duress.
A bad answer (stated or unavoided) is that he hasn't had any
portfolio input since your account was opened.
The bad answer means there is no Plan B if his firm
implodes, uses self-serving products or forces him to sell you things you
wouldn't touch with rubber gloves.
They may never happen – but you are trusting him to tell you
if they do.
Sometimes I imagine investors embracing these truths and
flocking to my door.
That doesn't happen very often. Trust is deeply personal. Verifying it can be uncomfortable. Many investors won't even risk the pain of
learning (or finally admitting) their trust has been misplaced. If they get that far, they have to find
somebody new without any idea how to look.
One of the reasons I've made my practice so transparent is
to save clients the embarrassment of asking if I'm honest. I explain how I handle those
conflicts-of-interest early in the conversation so they always know it's OK to
hold me accountable. If you advisor has
earned your trust, he won’t mind either.
Find the courage to verify the trust your advisor must earn
every day. It makes everything better. You may even like him more. sh
PS- Or just come see
me!
The opinions expressed here are those of Skip Helms and do
not necessarily reflect those of LPL Financial or anyone else. Investing
involves risks, including the loss of principal. Securities offered through LPL
Financial, Member FINRA/SIPC. OLLI, Helms Wealth Management, and LPL Financial
are separate entities.
