Recently my dad passed away. To help my mom gain an understanding of her financial situation, I needed to learn about the financial advisor they were working with.
My parents came from a generation where it was considered rude to discuss money (and politics and religion). Good parents didn’t burden their children with the stress associated with money, even if those children had grown children of their own.
When I was young, anything related to money was discussed in hushed tones. As a result, when Dad said that we didn’t have any money, I believed him and thought we would be out on the street the next day. Only much later did I learn that some people feel they don’t have any money unless they have $100,000 liquid (this was not, regrettably, ever my dad’s situation).
So I needed to conduct a financial advisor evaluation on my mom’s advisor, hired by my dad, and the services that he was contracted to provide.
I am sharing the financial advisor evaluation process I went through with the suggestion that you conduct a similar evaluation of your advisor at least once each year. Typically this is best done after the year concludes. This year’s evaluation might be a bit different from most because of the significant volatility we experienced in the markets.
I should mention that I run a Registered Investment Advisory (RIA) firm that has more than a half-billion dollars under contract, so I can assure you that I touched all bases during my financial advisor evaluation, an outline of which appears below.
Learn exactly what you are paying
My mom wondered how my financial advisor evaluation process would work. I said I would start by asking what he is charging and what services he is providing.
Mom said: “You can’t ask him that, it would be rude. He might be offended.”
You may feel the same way about discussing fees with your advisor. However, I can assure you that your advisor will not take offense and probably spends a significant part of his or her day talking about fees.
Most advisors (brokers especially) have transitioned from a transaction based service model to one that is consultative. It would be unusual now to be charged only on your account activity (buying and selling of investments). So it is likely you are being billed an annual percentage fee that varies based upon the amount of assets you have with your advisor.
A couple thoughts here. Most advisors have a fee schedule that declines as assets increase. For example, 1% (or 100 basis points) on the first million and .50% (or 50 basis points) on anything above that. Unfortunately, most investors use multiple advisors and end up paying much more for advice than they need to, since they are always stuck in the meaty part of the fee schedule.
For example, if you have $1 million with Advisor A and your spouse has $1 million with Advisor B, you are paying $20,000 per year in advisor fees (using the fee schedule above). However, if both of you used the same advisor, you could save $5,000 per year. The easiest way for many couples to increase their portfolio returns is to place all of their investable assets with the same advisor.
I talk to many investors who feel that paying 1% per year is too much when they have no trading activity. They complain that their advisor isn’t doing anything for them but collecting a fee.
If you feel that way, place your assets with a discount broker (Schwab, for example) and hire a financial planner at an hourly rate each year to review your portfolio and make recommendations.
Discuss fee transparency
Some advisors receive payments from mutual fund families, insurance companies and other financial institutions. As a result, it may take a little work for you to determine exactly how much they earn from working with you.
As part of your financial advisor evaluation, you will need to ask your advisor whether he/she receives any revenue in addition to the fees that you pay. If your advisor does, that is generally not a good sign, because the advice shared with you may be conflicted.
It is best to work with advisors whose only source of revenue are the fees you pay them.
Understand your investment costs
Most of us invest in mutual funds. If these funds comprise the majority of your portfolio, you need to determine whether you are using the cheapest share classes available for each fund.
You can do the research yourself, or ask your advisor. Generally the institutional or “I” share classes are the least expensive. If you aren’t in the lowest-cost share class for each of your funds, find out why. You may not be able to meet the minimum investment required, or your advisor may have you in a higher-cost share class because it pays him/her additional revenue (which is not a reason you should accept).
Keep in mind that Fidelity, Schwab and Vanguard have been aggressively lowering their investment minimums and expense ratios on their index funds. It could be that a fund from one of these firms can be a less costly alternative to achieving your investment objectives.
Determine whether your advisor is a fiduciary
One of the most important parts of your financial advisor evaluation process is to learn whether your advisor is a fiduciary for the advice shared with you. Advisors who are fiduciaries sit shoulder to shoulder with their clients regarding their advice. They take on legal liability for the recommendations they make. These advisors put their clients’ interests first, above and beyond their employer’s — they are required to under the law. The only fees these advisors earn are from their clients, and therefore they provide unbiased advice.
Advisors who aren’t fiduciaries are usually conflicted. They generally place their employer’s ahead of their clients and typically receive additional revenue from third parties (mutual funds, insurance companies, etc.). They aren’t bad people, they just aren’t able to provide the same type of conflict-free advice as advisors who act as fiduciaries.
Get a list of the services you should be receiving
Once you have an understanding of what you are paying and how it is charged (quarterly, annually, deducted from assets, etc.), the next step in the financial advisor evaluation process is to understand what that is buying you.
Most advisors will conduct at least an annual, in-person review with their clients and provide continual portfolio monitoring services. More frequent reviews are possible (quarterly is the most frequent you can get) but are dependent upon the amount you have with that advisor. If you have $100,000 with your advisor, you aren’t going to get quarterly reviews.
The more money you have with an advisor, the more services you can expect to access. Tax preparation, estate planning services, legal advice and document preparation are just some of the services that you could expect your advisor to either coordinate or deliver if you have a significant sum of investable assets with that advisor.
Check your advisor’s background
Studies have shown that investment advisors who have been sued in the past are more likely to be sued in the future. You don’t have to work with problem advisors. Make sure you check the background of your advisor using BrokerCheck as part of your financial advisor evaluation.
BrokerCheck is a free service provided by the Financial Industry Regulatory Authority (FINRA), a financial industry regulatory agency under the direction of the Securities and Exchange Commission (SEC). Any violation you find on the BrokerCheck website for your advisor should cause you to begin searching for another.
Don’t worry, your advisor is not notified when you use BrokerCheck.
Make sure you are getting leading-edge advice
You should hear about new ideas that may affect your investment portfolio from your advisor and not from somewhere else.
If you are reading about something that you believe directly affects your investment strategy, or you hear from friends that their advisor is recommending something that appears to relate to your investment portfolio, and you haven’t heard the same thing from your advisor, that should concern you.
Confirm that your advisor has no conflicts of interest
Don’t work with an investment advisor who works for an asset manager. For example, many investors use representatives from mutual fund companies, banks or insurance companies as their investment advisor. No surprise, these investment advisors tend to overuse the investment products their firms offer.
In addition, you may not be aware that advisors who work for mutual funds, banks and insurance companies are required to recommend their firm’s investment products first, regardless of whether they are the best option. These advisors are always conflicted regarding the investment advice they share.
Work with an advisor who has no conflicts of interest. These advisors will make the best recommendations based on your goals and objectives. Generally, advisors who work for RIAs work with the entire universe of options and are conflict-free.
One of the most important goals of your financial advisor evaluation is to determine whether you are receiving unbiased advice.
Check the marketplace
After you have developed an understanding of what you can expect to receive from your advisor and what you will be paying, complete your financial advisor evaluation by making a couple calls to other advisors to see how they compare.
Ask general questions about costs and services. Don’t consider moving to a different advisor just because you aren’t working with the lowest-cost advisor. Be satisfied if the fees and services of your advisor are in the same ballpark with those of the other advisors you are checking.
Finally, to supplement your financial advisor evaluation, you may wish to take a few minutes and review the list of questions that the SEC suggests asking your advisor.
Good luck with your financial advisor evaluation!
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton is an award-winning 401(k) investment adviser with over 30 years of experience. He has consulted with many Fortune 500 companies, including: Aon Hewitt, Apple, AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Corporation, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or email@example.com.
Lawton Retirement Plan Consultants, LLC (LRPC) is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to employer retirement plan sponsors. The firm specializes in Socially Responsible Investment (SRI) strategies for retirement plans and is a pioneer in the field. LRPC currently has contracts in place to provide consulting services on nearly a half billion dollars in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or firstname.lastname@example.org or visit the firm’s website at https://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, a plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice, and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.