A good friend who recently inherited a few million dollars asked: “Why am I scared to death?” The death that precipitated the inheritance aside, he should have been pleased with his new pile of dough. But managing a lot of money is nerve-racking, especially when it’s your own. Your own sound judgment may evaporate in the face of dollar signs, and trusted advice can be hard to find.
As one approaches retirement, the tremendous responsibility of making your money last can be daunting, as Miller’s Money subscriber Julie G. shared with me. She wrote:
“Recently I’ve been reading voraciously on the subject of protecting assets and money management. I’m soon going to be looking after more money than I have ever been responsible for in my life. I’m looking for specific referrals for wealth managers that share your philosophy.”
Rewind twenty-plus years and you’d find me in a similar frame of mind. I had recently remarried and was responsible for looking after my new mother-in-law’s entire nest egg. (If there’s anything scarier than screwing up your own retirement, it’s screwing up your mother-in-law’s.)
Here’s the good news for Julie: She has made the first correct move by researching qualified professional help. Several loyal subscribers have written with similar requests, and it’s about time I responded.
Duty Owed to Clients
In our February 2013 edition of Miller’s Money Forever, we detailed how to locate and interview a good financial advisor. It starts with understanding the two different levels of responsibility an advisor can owe his clients.
The first is a fiduciary responsibility. Fiduciaries are required to put their client’s interests ahead of their own. They have a duty akin to that of a lawyer to his client or a trustee to the beneficiaries of a trust.
In the financial planning world, a Certified Financial Planner (CFP) falls into this category. You can find a list of CFPs in your area or verify your planner’s certification on the CFP Board website. Associations like the National Association of Personal Financial Advisors (NAPFA) also require their members to act as fiduciaries. In addition, a Chartered Financial Consultant (ChFC) is subject to this standard; the educational requirements for becoming a ChFC are particularly rigorous.
The suitability standard is a different, lesser level of responsibility. Generally speaking, it applies to stockbrokers and others who sell investment products. They need only recommend investments suitable for their client’s willingness and ability to take on a particular level of risk.
If, for example, a stockbroker subject to the suitability standard advises an 80-year-old widow to invest in a mutual fund containing solid utility stocks, he is in the clear even if the fund charges outrageously high fees. The fund need not be the best option. Even if there are better or lower-cost alternatives available, the stockbroker has committed no foul.
Such advisors usually offer a free portfolio analysis to anyone who walks in the door. They feed some basic facts about you into their company computer and out pops a list of recommended investments. If the advisor is a stockbroker, the list will be flush with mutual funds managed by his employer. If the advisor is an insurance broker, then insurance products are the answer. To be fair, their recommendations are often on target—or at least close to it. Nevertheless, there are likely better and lower-cost options available.
Don’t let big household names draw you off track. Advisors at captive houses—large, well-known brokerage firms that manage their own mutual funds—are only subject to the suitability standard, for the most part. These people are under tremendous pressure to sell their company-sponsored products. These funds might perform well, but be very wary of a one-size-fits-all approach to money management. A good CFP can pick and choose the best investments and ideal allocation balance for you.
So, cut any advisor not subject to the fiduciary standard from your list of prospects. A professional designation requiring a fiduciary duty is a good start, but you should still perform your own due diligence. There are several sites that track broker and advisor improprieties. Here are a few places to check:
- The Financial Industry Regulatory Authority (FINRA)This organization is the same one that administers the Series 7 Exam. Its search tool lets you find out how long an advisor has been registered and if he or she has any history of incidents. It will even tell you whether or not someone has been fired. Once you’ve selected an advisor’s name, make sure to click on the detailed report link which specifies everything from a complete employment history to descriptions of specific damages and incidents.You can also look up information about individual firms, such as their assets under management and the size of their average client.
- SEC Investment Advisor Public Disclosure (IAPD)This is another site with much of the same information as the FINRA site.
- North American Securities Administrators Association (NASAA)This site has a couple of interesting ways to find out more about offenses in your state. First, you may browse its contact list of state regulators, or you may also view its list of state enforcement websites.
Once you have a list of certified candidates in your area who have managed to keep out of trouble, it’s time to find the real experts. Education and certifications don’t mean much without real world experience. Let the hotshot fresh out of college make youthful mistakes and overcome his learning curve with some other client. Tossing the inexperienced newbies should shorten your list considerably.