Who is your advisor really working for?
Originally published on: July 8, 2015
How can you know exactly when a company or professional is required to look after your needs above all else? That kind of responsibility is a lot less common than you might think – even where your retirement money is at stake.
On one hand, consider people like police officers, doctors, and (it’s true!) sometimes even lawyers. They all take an oath of some kind, to uphold the law, care for your health and life, or at least represent your interests against someone else’s.
If you’re fortunate to have a 401(k) plan, your employer also has a pretty serious legal burden to make sure your money is looked after prudently and in your interest. It’s called fiduciary responsibility. Unfortunately, this is only rarely put to the test. The concept is abstract enough that in actual practice there’s a lot of disagreement about what exactly it means and requires.
The Wild West
On the other hand, there are the casinos in Vegas, the car dealer down the road, and your mobile phone provider. They’re all looking to take you for everything they can get. Fortunately, factors like competition, regulation, and your own common sense usually stop these operations short of real highway robbery. In between, however, there are plenty of gray areas.
Surprisingly, many investment advisors are in the middle ground – at least in the eyes of the law. Someone who tells you how to invest your money can often legally tell you to purchase a product for which they get a commission. Their payment may vary depending on which product you buy, and this of course could influence their guidance. They may also receive various kinds of hidden incentives and bonuses that are in fact just kickbacks. And some of the investments they recommend may come with higher fees that can cost you much more.
These advisors, broker-dealers, or insurance specialists and may be well-informed and genuinely helpful – or they may be no more than salespeople, plain and simple. In fact, those that we know are honest, trustworthy professionals who really want to help their clients succeed. The problem isn’t them. It’s the incentives that are built into the system.
How can you guarantee you’re getting unbiased advice? The key is to disconnect the advisor’s own compensation from any specific advice they may give you. First, know the difference between a fiduciary advisor and the other kinds. The key words are “registered investment advisor,” which means the individual or firm is vetted by the proper federal or state authorities, and legally bound to consider your financial interest first.
Another important term is “fee only” advisor, meaning that the fee you pay them is the only one they receive. That way you know they’re working for you. You might also consider paying a flat fee, which puts even more distance between the advisor’s compensation and the details of your investments. A pricing disclosure that up-front and easy to read is a good, sign too, especially online where it’s difficult to ask questions.
When in doubt, keep in mind that the investment business is just that – a business. It’s up to you to be an informed customer.