How To Choose A Financial Advisor
More than 650,000 so-called financial advisors in this country are eager to recommend how you should invest your money. However, not all of them are required to uphold your best interests above all.
How do you sort through different companies’ claims to find an advisor who’s truly focused on doing what’s right for you?
In this episode of The Science of Economic Freedom, I delve into why so many investors get poor advice at their expense. My guest Matt Cook, a Certified Financial PlannerTM with Mercer Advisors, shares one crucial reason: Not all financial representatives are bound by the same rules.
About 83% of advisors follow the suitability standard, which allows them to promote their own company’s investment products—while earning a commission on what they sell—provided the investments are suitable for their clients’ goals. By contrast, says Matt, he and other Registered Investment Advisors (RIAs) are required under the fiduciary standard to put clients’ best interests ahead of their own.
Matt provides several other tips for evaluating different advisors, including three questions to ask yourself:
- Am I getting clarity or confusion out of our conversations?
- Do the investment options in front of me feel relevant to my personal situation?
- Is my advisor proactively working to guide me through the various stages in my financial life?
He also talks about what distinguishes comprehensive wealth management from simple investment advice, and how the financial services industry has changed over the past 20 years.
If you’re looking for reliable tools to help you choose a trustworthy guide on your wealth management journey, then give Episode 44 a listen.
Doug Fabian: What should you know about the financial services industry before you hire an investment advisor? What questions should you ask? Today, on the Science of Economic Freedom, we prepare you for hiring an investment advisor with a User’s Guide to Investment Advice.
Announcer: The Science of Economic Freedom is intended as an investor education resource. The views and opinions expressed on this program should not be construed as a recommendation to buy, sell, or hold any specific security. Consult your investment advisor and read any investment perspectives carefully before making any changes to your investment portfolio.
This program is sponsored by Mercer Advisors. Mercer Global Advisors Inc is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors Inc is the parent company of Mercer Global Advisors Inc and is not involved with investment services.
Doug: Welcome to the Science of Economic Freedom. I’m your host, Doug Fabian. This podcast is all about helping you achieve your financial dreams. We call that economic freedom. This program is about your journey to achieve economic freedom for yourself and your loved ones.
Today, we want to help you identify your next step on that journey. This is Episode 44, a User’s Guide to Investment Advice or What Should You Know Before You Hire An Investment Advisor Or Wealth Manager.
Today we have a guest expert. Matt Cook, certified financial planner, client advisor and branch manager of the Santa Barbara office of Mercer Advisors. Today, we’re going to discuss the terminology of investment advice, financial planning and wealth management.
We’re going to talk about asking the right questions before you hire a firm and the importance of reading the fine print before you invest any money. It’s a cold, cruel world out there in the land of investment advice. There are 650,000 so-called advisors ready to tell you what to do with your money, but not all advisors are the same, and neither are the companies they work for.
There are many types of businesses in this field, banks, brokerage houses, insurance companies and independent advisors. Some have your best interest as their primary objective. Others place their interest ahead of yours. As I mentioned, 650,000 registered reps through FINRA. FINRA is the Financial Industry Regulatory Authority, which has been authorized by congress to protect American investors.
Here’s a quote from the FINRA website:
Every investor in America relies on one thing, fair financial markets. That’s why FINRA works every day to ensure that every investor receives basic protections that they deserve. Anyone who sells a securities product has been tested, qualified and licensed. Every securities product advertisement used is truthful and not misleading. Any securities product sold to an investor is suitable for that investor’s needs and investors receive complete disclosure about the investment products before purchase.
Now, our purpose today is education, enlightenment and understanding. There are still too many people getting bad investment advice at their expense. Now, I want to introduce our guest, Matt Cook. Matt, as I mentioned, is the branch manager of the Santa Barbara offices of Mercer Advisors, and, Matt, my pleasure to welcome you to the Science of Economic Freedom podcast.
Matt Cook: Thank you, Doug, I appreciate being here.
How to choose financial advisor
Matt Cook: I joined Mercer right out of college. I got a degree in Economics and Business and during my senior year, when I was doing informational interviews, I discovered what a rewarding field financial planning really was.
Well, here at Mercer, we usually start at the bottom. I was making coffee, getting copies, and back then, we even had a town car, that we picked clients up from the airport or from their hotel, when they came into town for their annual meeting. After I passed my certified financial planner designation, I became an advisor in 2006.
Starting in 2011 through 2016, I served a dual role in addition to my advisory capacities, as a regional vice president, not just as an advisor, but also as a salesperson here on the central coast in Southern California. In 2015, the company asked me to assume the branch manager position of both the Los Angeles and Santa Barbara offices in addition to my work serving the high net worth clients of the firm.
Doug Fabian: Well, you’re certainly in a great position to be able to help us with this subject today. Let’s start, Matt, with the institutions. There are different companies that serve investors. Let’s briefly explain some of the mechanics. Let’s start with a broker-dealer. What is a broker-dealer?
Matt Cook: Well, in financial services, a broker-dealer is either a person, a company, or even an organization that engages in the business of trading securities for its own account or on behalf of its customers. Broker-dealers are really at the heart of the securities and derivatives trading process.
Some broker-dealers are independent, meaning firms that are solely involved in broker-dealer services and many others are business units operating as subsidiaries underneath commercial banks, investment banks, or large investment companies.
What is a custodian and how are they different than a broker-dealer?
Matt Cook: Well, a custodian is a type of financial institution that holds customer securities like stocks, bonds, mutual funds, or ETFs. This custodian would hold these securities and other assets in either electronic or physical form.
Since they’re responsible for the safekeeping of these assets, that may be worth millions or billions of dollars, custodians tend to be large and reputable firms. A custodian is sometimes called a custodian bank. Some big examples that you might have heard of would be Charles Schwab, Fidelity, TD Ameritrade or E-Trade.
Doug Fabian: Let’s jump ahead and talk about an investment advisor and how do they differ from the firms we talked about?
Matt Cook: Mercer Advisors is a registered investment advisor. We’re regulated by the SEC under the Investment Advisers Act of 1940. This defines an investment advisor as any person or group that makes investment recommendations or conducts securities analysis in return for a fee, whether through direct management of client assets or through written publications, think newsletters.
Doug Fabian: And, also, banks, broker-dealers, insurance companies, are sometimes acting as advisors and broker-dealers, but we encourage the audience to be aware of companies that are selling their own products to investors.
What does FINRA mean and who is a part of it?
Now, Matt, let’s turn our attention to the people, the advisors, we talked about these 650,000 individuals who are registered with FINRA. Explain those groups.
Matt Cook: They generally fall into two broad categories. 540,000 are registered representatives. These folks work for banks, insurance companies and broker-dealers. The remaining 110,000 are investment advisors. These are registered investment advisors operating under the 1940 Act and they act as a fiduciary.
An important distinction, which I’ll explain later, is whether these individuals are held to a suitability standard or the fiduciary standard. Further confusing the customer, some of these can act as both.
Doug Fabian: So you can be working with an advisor who is a fiduciary, but who can also sell a product that they can receive a commission on?
Matt Cook: Yes.
Doug Fabian: Give me an example of that.
Matt Cook: I recommend always following the money. There are great people everywhere working for all these different institutions, but oftentimes the companies one works for guides their employees away from always acting in their client’s best interest.
Types of fees when choosing financial advisor
Let’s talk about fees right now because they’re critical to understand. I see four big categories of fees.
The first type is commissions. These are often hidden, kind of like pricing when getting a mortgage. They can be either upfront and ongoing in the form of 12b-1 fees.
Another type would be product fees. These are things that are tied to mutual funds or insurance products.
A third type of fee would be transaction fees. This would be the cost of buy and sell and they’re fairly transparent and show up on your investment statement at the end of the month.
An advisory fee is the fourth type of fee. This is usually a flat percentage rate, a flat dollar amount, or even an hourly rate.
Doug Fabian: Matt, let’s go back to the subject of the standards. The suitability standard and the best interest of your client or the fiduciary standard. How are those different, how are they deployed in terms of investment advice?
Matt Cook: Advisors who work for institutions that operate under the suitability standard are usually product focused. Their company sells ABC annuity and that’s what they’re allowed to talk about with their clients. Contrast that with advisors who operate under the fiduciary standard. They’re product agnostic. They can focus on the things like quality, flexibility, and cost over a range of different products.
Doug Fabian: Now, let’s talk more about this fiduciary standard, fiduciary relationship, and why someone should hire a fiduciary?
Matt Cook: According to a recent survey, 93% of Americans think investment advisors should always be required to act in your best interest. This is the true definition of a fiduciary. Think of how your physician or an attorney or a CPA behave. They always act in your best interest and they’re held to that standard.
What should happen before you invest any money?
Doug Fabian: Now, before you invest, before you invest any money, what should happen in that relationship and that discussion, what should take place?
Matt Cook: As an advisor and a wealth manager, I wouldn’t dream of building a portfolio or providing investment advice until I really understood a client’s situation. I use the example of a contractor who wouldn’t dream of starting to build your house until he had a detailed set of plans to work from.
Now, a word of warning here, make sure you put your guard up if you’re talking with an advisor and one of the first things they start to reference is an investment product. If they go right to features and benefits, it’s likely they’re not going deep enough into your own financial situation to ensure you really got the right solution in front of you.
Doug Fabian: So talk about our process, Matt, our process at Mercer Advisors, how we start to engage and discuss with clients before we invest money.
Matt Cook: Doug, I really appreciated how your earlier podcasts have gone into, in-depth, a lot of the best practices in the industry. And Mercer adopts many of them. We’re a wealth manager, so that means we begin with this plan. It serves as the blueprint to help clients evaluate things like their balance sheet.
How much debt do they have? It also helps us evaluate their spending plan. What sort of income are they likely to have in the next few years and into the future? And more importantly, what are their spending goals? Do they have kids going to college that they want to support? Are there lifetime dreams that they want to accomplish in retirement?
These long-term projections give us a launching point from which to understand where clients are going. As you know, the tax code is complex and constantly changing. Strategies there are really important. Leaving a legacy and estate planning are also part of the upfront planning process.
Doug Fabian: One of the things that we do, and I had a chance to have this conversation with a client the other day, as wealth managers, is we’re not just looking at the investment portfolios of our clients. We’re really trying to help them project forward how they’re going to handle all of the assets that they’ve accumulated over their lifetime. So explain how that works with your clients?
Matt Cook: It’s certainly not an easy question to answer, but it does involve going into detail with the client to help understand what the plan is for each and every asset on their balance sheet. It’s not a simple answer. It is complex. There’s many moving parts, and the more you understand about where you are today, the clarity you need, and where you’re going in the future, and the strategies to get there, the better the solutions you’ll be able to start on today.
How should an investor evaluate their advisor and the advice that they’re receiving?
Matt Cook: I would really like three questions.
The first one, am I getting clarity from my conversations with my advisor? After leaving a meeting, I don’t think you should be confused.
The second question that’s good to ask is are you getting good insight about the various options in front of you? Your advice should be cutting-edge. It should be applicable to your personal situation.
And the third question that’s good to ask is my advisor in regular partnership with me? Meetings, proactive contact, help guide you through the ages and stages of life that you’ll inevitably face. This accountability on both sides of a relationship is so critical.
Doug Fabian: Now, let’s dive a little deeper into the conversation about a wealth manager. Mercer Advisors is a wealth manager, we think that that is different from just an investment advisor. Let’s talk about that.
Matt Cook: We’re different than simply an investment advisor as you know it. They focus mainly on the market and a response to them. A wealth manager focuses on all aspects of your financial life including the markets. The client Mercer usually works best with are those that seek this advice in areas broader than just simply how did my accounts do last quarter?
In fact, research has shown, done by a number of large, reputable forms like Fidelity, Vanguard and Morningstar, that those who work with advisors who offer these planning services, tend to outperform those clients who don’t, even after all fees are considered. I’m proud to say that our own internal studies here at Mercer show our clients have similar positive results as well.
Doug Fabian: One of the things that I’m tasked with, with the company, is having conversations with investors who are seeking an advisor. I want to just go over with you, Matt, when in someone’s life they should consider hiring an advisor.
Matt Cook: You never want to jam a square peg down a round hole. So the easy answer would be is when you’re ready. But to be frank, most people don’t start asking questions until they’re faced with something like the following: a life event. Things like divorce, death, new children, new grandchildren, or even great grandchildren, or even a major financial event like a business sale, or an inheritance, a house sale, or maybe you’re reaching Social Security and Medicare age.
A career event is also a trigger as well. A job change, the decision, boy, it’s finally time to start building wealth. But one of the most common areas when people come to us is the retirement red zone, those years just before or just after you stopped working for income. Simply put, when you need clarity, insight, and partnership in your financial life, it’s time to start talking to a financial advisor.
How has the financial advice business changed since you first got started?
Matt Cook: We’re definitely seeing the industry moving into a more positive direction. The only fiduciary advice used to make up about 12% of the industry, now, it’s about 40%. This is a great thing for financial consumers. I also believe that the economic crisis, the great recession of 2008, made investors more suspicious, a little bit more hesitant, and more likely to ask those hard questions upfront. This transparency, I believe, is a good thing, and fiduciary-based advisors have nothing to hide in this regard and they’re reaping the benefits of that growth.
Doug Fabian: Let’s have some last words of advice for our listeners, Matt. Again, our subject today, the User’s Guide to Investment Advice, what you need to know before you hire an advisor, how would you sum things up?
Matt Cook: Ask questions, read, research, there are lots of resources available to you. Understand the nuance and the difference between the fiduciary and suitability standards. Make sure you know how your advisor is going to get paid. Understand how often you’re going to meet with your advisor. And confirm the services your advisor provides.
Oftentimes, what you need today is going to be very different to what you need five to ten years from now. We certainly haven’t made it easy in this country for investment advice to be given. There’s lots of pitfalls, there’s lots of hurdles, there’s lots of confusion in financial jargon.
I recommend, as you get more and more comfortable with the terminology, with the concepts, that you interview a few different firms, a few different advisors to help get yourself educated and a little more clear about what you want and where you’re heading.
Doug Fabian: Thank you, Matt. I think that this has been extremely helpful for our audience and appreciate having you on the podcast today.
Matt Cook: You’re welcome. Glad to be here.
Doug Fabian: Ladies and gentlemen, I’d like to wrap up each of the podcasts that I do for you with some action steps. So let’s think big picture relative to what we’re talking about here today. As Matt said, you want to ask questions when you’re going to be hiring an investment advisor. You want to interview more than one person.
Certainly, it’s always great to be able to get a referral from family members or friends, but having conversations, and comparing, and contrasting services and credentials between one advisor and another is going to be very helpful. Also, as Matt mentioned, you want to make sure you understand the services that you’re going to be provided.
Am I going to receive a financial plan as a part of that relationship or is there an additional charge for that financial plan? What type of investments are you going to be recommending? How are you going to be getting paid on those investments? And what should be my expectations going forward on how often we’re going to meet and the like?
There are many, many challenges on the road to economic freedom. There are many different stages in life that you’re going to go through. You might not think that you need an estate plan at the very beginning of your journey, but you’re going to need an estate plan someday. You’re certainly going to need tax advice all along the way.
And, also, one of the primary reasons to hire an investment advisor is to be able to help you with investment behavior. Investment behavior is when you feel like you’re panicking when the markets are down, and we’re in a difficult period of time, and it feels like you want to take all of your assets out of the financial markets because they’re being priced every day and it seems like you’re seeing nothing but losses. These are some of the things that you want to think about before you go about hiring an investment advisor.
Now, as always, we want to hear from you and if you would like to send me an email, my email address is [email protected], [email protected]. If you have any comments, questions, suggestions about future shows, we would certainly like to hear from you.
Well, we hope this program today helps you on your journey to economic freedom and we thank you for listening. This is Doug Fabian. Have a great day.
Announcer: The Science of Economic Freedom is intended as an investor education resource. The views and opinions expressed on this program should not be construed as a recommendation to buy, sell, or hold any specific security. Consult your investment advisor and read any investment prospectus carefully before making any changes to your investment portfolio.
This program is sponsored by Mercer Advisors. Mercer Global Advisors, Inc. is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors, Inc. is the parent company of Mercer Global Advisors, Inc., and is not involved with investment services.
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