Ronald Reagan often said, “Trust but verify.” Reagan was referring to America's interactions with the Soviet Union regarding nuclear disarmament, yet this motto should also be applied to various consumer situations.
When you're working with any financial adviser, you must trust them — at least on the surface. Yet, as professionals, they must earn your trust before you transfer your assets to their firm or write them a check. To earn your trust, they must be able to demonstrate they deserve it, and it's your responsibility to determine this.
As a financial consumer, you must look after your own interests, so verification is critical. You need to know how an adviser invests their own money — whether they "eat their own cooking." Also, is their approach based on financial science or the hype and hope of slick marketing?
Above all, you must make sure that any adviser you're considering hiring will be passionately committed to always putting your interests first. The financial services industry, awash in conflicts of interest (many, unfortunately, legal), is quite successful at making money — for itself. Only you can decide whether an adviser is worthy of your trust and your assets.
Some key things to look for regarding any adviser candidate include being certain that:
• The adviser is a true fiduciary. This is a legal/regulatory term meaning that a financial professional is duty-bound to always put clients' interests first, avoiding even the appearance of a conflict of interest.
Unfortunately, many "advisers" are actually salespeople pushing products and receiving substantial commissions. There's an inherent conflict of interest in advising people one minute and then turning around and selling them products that bring lucrative commissions the next. This is a red flag.
"Advisers" who offer advice and can also earn commissions are fee-based advisers — not to be confused with fee-only advisers, who never receive commissions. And, to be sure that an adviser is a fee-only fiduciary, ask for a copy of their Form ADV (a disclosure document they file with the Securities and Exchange Commission) and also insist that they provide something in writing declaring they're a fiduciary. If they won't, run (don't walk) away.
• The operations of the adviser should be transparent and verifiable. Bernie Madoff's victims couldn't verify his financial management because he controlled the custody of their assets and easily manipulated performance statements. This should have been an immediate flag to Madoff's investors to stay away, because his black box operation lacked checks and balances or any transparency.
A reputable CPA firm would never have certified his books. And the regulators and investors would have seen huge discrepancies between Madoff's investment statements and the amounts in custody if an independent custodian had held the investors' assets.
• The adviser bases opinions and practices on sound, evidence-based research like that presented in peer-reviewed academic financial journals. Tenured professors who do this research get paid no matter what their research finds. This isn't the case with financial professionals who have a biased financial interest in their research findings.
• The advisers' practices include a sound basis for formulating and maintaining a comprehensive financial plan that emphasizes long-term, net returns by considering the three bogeymen of investing: fees, taxes and inflation. These eat away at your investment returns. This plan should also be designed according to your personal goals and risk tolerance.
• The adviser's financial plan includes a comprehensive analysis of your insurance needs and tax-reduction strategies.
• The adviser is knowledgeable about wealth preservation and estate planning and will gladly work together with your tax adviser and attorney to maximize your heirs' eventual wealth. Not only is this financially beneficial for all but can also keep family bonds strong. Without proper planning, there is often distrust and eventual bad blood between heirs after a benefactor passes on.
If you evaluate adviser candidates by these criteria, you'll be protecting yourself and your family. Remember: Hiring the wrong adviser can be hazardous to your wealth and your family.
Tim Decker, a fee-only financial planner, is president of ISI Financial Group in Lancaster. Contact him at www.isifinancialgroup.com.
This content is based upon information believed to be accurate by ISI Financial Group Inc. However, it should not be relied upon for legal or accounting purposes. Past performance is not indicative of future performance. Investments involve risk, including the possible loss of principal. Always seek professional advice before making any financial or legal decisions.