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Ask Financial Advisers About Fees and Conflicts

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Do you ever suspect that financial advisers put a greater priority on earning commissions and making profits for themselves than looking out for you and your nest egg—whether they are suggesting a stock, a fund, an annuity or something else?

An Obama-era federal rule sought to require advisers who work with tax-advantaged retirement savings to put client interests first. President Donald Trump has told the Department of Labor to review and possibly revise or scrap that “fiduciary rule,” suggesting that the rule may hurt investors by limiting their access to certain investment products and advice.

If you have a financial adviser or are considering hiring one, it’s important for you to understand how the adviser gets paid and what conflicts of interest he/she may have. Bottom Line Personal asked highly rated financial adviser Mark Cortazzo to explain how you can be sure that you’re getting financial ­advice that is given in your interest—­regardless of the fate of the fiduciary rule.

Here are seven questions Cortazzo suggests you ask to help you understand how your current or prospective financial adviser gets paid and how that might influence the advice you receive…

The Key Questions to Ask

Is your advice to me subject to a fiduciary standard? With the government’s fiduciary rule in limbo, this is a good question to start the discussion. You may get a simple “yes,” as in the case of a registered investment adviser (RIA), who already is subject to a ­fiduciary standard and typically charges clients a fee that’s a percentage of the clients’ assets rather than commissions on specific products.

Or you may get a more complicated answer if you’re talking to a broker, wealth manager or insurance agent. The term “fiduciary” just means that there’s a commitment to put the client’s interests first. Even if your adviser is not subject to a legal requirement, the firm may have rules in place meant to approximate such a standard. Make sure that the firm’s rules are explained clearly and in writing.

Some advisers might answer you by saying, “Part of the time.” For example, an adviser could act as a fiduciary when recommending mutual funds but not when selling you an insurance product such as an annuity. Be more skeptical of anything offered under such an exception, and don’t hesitate to go elsewhere to buy or get advice on that product.

Helpful: A designation of CFP, or certified financial planner, from the CFP Board of Standards, an industry group, requires that the adviser meet a fiduciary standard, but there is no guarantee of full compliance. Also, you can ask your investment adviser to notify you, in writing, of any instance in which he will not be acting as a fiduciary.

Have you changed your standards or practices at all since the fiduciary rule was announced? Some investment firms have said that they would go ahead with changes to how their advisers function no matter what happens with the federal rule. For instance, Merrill Lynch has said it will stop offering new commission-based IRAs through advisers. Instead, it will allow customers to choose whether to work with human advisers by paying fees based on the amount of assets in the account…or to use commission-based self-directed brokerage accounts…or to use fee-based automated ­robo-adviser accounts.

Some advisers will tell you that there is no need for a change. If that’s because the individual or firm has been subject to a fiduciary requirement all along, fine. If the adviser starts talking about the flexibility to offer you more products or get you a better deal—or if he seems most interested in talking about the importance of his own compensation—be wary. Consider going elsewhere.

Will you earn more by putting my money into this fund rather than something similar from another company? The answer with the least potential for a conflict of interest is that the adviser collects an advisory fee based on your account value rather than commissions or transaction-based fees of any kind, because that isn’t going to create an incentive to sell a particular product. An adviser whose ­compensation will vary depending on what funds or investments you buy faces a conflict. You should make certain that you understand all the costs and how they compare with competing products and services. Of course, if you highly value a particular adviser’s advice, you might choose to accept higher costs than you would be charged elsewhere.

You can arm yourself for this discussion with this simple step: Read your adviser’s business card. If the name on a fund or other financial product that you are offered is the same as any name on the card—the name of the firm in large type or an affiliate in the fine-print disclosures—then you should ask a lot more questions.

Helpful: Even if your adviser has answered this question to your satisfaction, consider the next question.

Are you more loyal to your clients or to your employer? The answer may not always be completely honest, but it is worth raising the issue of whether your adviser is pushing the “house brand” of investments—and whether that’s appropriate. Even if the adviser has no direct financial incentive, he still might recommend the company’s own products because selling more of them might earn an attaboy from the boss.

Helpful: Ask whether selling more company products is a factor in deciding promotions, and if the answer is yes, consider whether the honesty the person is showing outweighs the conflict of interest.

Do you go on “due-­diligence” trips? Due-diligence trips offer advisers a chance to meet investment managers and learn about their funds and other products. And that can be a good thing. For instance, last year I went on a two-day due-diligence trip during which I spent six to eight hours a day listening to speakers, including three Nobel Prize laureates, and I didn’t play any golf or tennis or go swimming. But if these trips involve less time learning about the investments and more time dining, drinking and golfing, that’s not a good thing. If an adviser seems nervous and evasive in describing the agendas and details of his past three trips, be wary.

Is the product I’m investing in the lowest-cost share class? Mutual funds and exchange-traded funds (ETFs) often have different classes with identical management but different expense ­ratios. Everyone wants low costs, which boost investment returns, but there sometimes are trade-offs worth considering. For example, an investor with a small amount of money might choose a share class that’s slightly more expensive but has no transaction fees when it’s bought or sold. If this investor is rebalancing his portfolio (and therefore selling/buying shares) multiple times a year, this could be cost-effective.

Helpful: At some large brokerages, you may find that a more expensive share class lowers your advisory fee, but make sure that the cost trade-offs have been explained clearly and completely.

The Trick Question

There’s one more question to ask your current or prospective financial adviser, and it really is a trick question because it is designed to keep an adviser from tricking you about how big the annual fee is…

Why is your advisory fee a quarterly rate? An advisory fee should always be quoted and discussed as a percentage of assets per year. If your adviser is talking about a quarterly fee, that’s a red flag that he is probably trying to hide things. I know of a firm that quoted its fee as 0.375% per quarter. That’s 1.5% annually, which in my opinion is on the high side.

Helpful: Always do the math so that you can compare annual fees.

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Source: Mark Cortazzo, CFP, CIMA, founder and senior partner of Macro Consulting Group LLC in Parsippany, New Jersey, which oversees $380 million in client assets. Cortazzo has been named one of the 250 best financial advisers in America by Worth and one of America’s top financial advisers by both Barron’s and Fortune. MacroConsultingGroup.com Date: April 15, 2017 Publication: Bottom Line Personal