Sure, your financial advisor claims to be giving you good advice. But just who is it good for?
All too often, it isn't you.
After all, the big banks and brokerage firms are in the business of selling products and producing profits. They're there to facilitate transactions - like buying and selling stocks, bonds and mutual funds - not providing unbiased advice to their retail clients.
There are some built-in reasons for that. The investment banking arms of the big banks reap huge fees for underwriting stock offerings and, in the process, acquire huge chunks of the stock. Somebody has to sell all that stock to the public. That's when the bank's distribution network swings into action. And that means the broker may be under pressure to persuade his or her clients to buy the stock.
But don't blame the poor broker for all of this. He's just doing his job. Because a broker isn't legally required to do what's right for the client – only what's "suitable."
What's harder to defend is the common practice of selling the products that bring them the highest fees and commissions rather than those that would be best for the client. But, then, people usually act to advance their own interests. Why should a stock broker act any differently?
The financial services industry is replete with examples of conflicts of interest, which Webster defines as "a conflict between the private interests and the official responsibilities of a person in a position of trust." It has also been defined as a situation in which a professional has a vested interest which may make him or her an unsuitable advisor.
So, how does one go about finding a suitable financial advisor? A source of accurate and unbiased financial advice?
Many experts suggest, as a first step, finding an independent Registered Investment Advisor. RIA's are fee-based advisors who are subject to the Investment Advisers Act of 1940 and who operate as fiduciaries for their clients. They are bound by law to put the interest of their clients above their own and to disclose any possible conflicts of interest.
Because a fiduciary has a legal duty to act in the best interest of the client, he or she must adhere to a much higher standard than that of stock brokers who must only establish "suitability" for an investment they suggest to a client.
But, beware. Only a fraction of those who call themselves "financial advisors" – which is what many firms call their brokers these days – have a fiduciary duty to their clients. Make sure you are dealing with one who is a Registered Investment Advisor.
And because RIA's are fee-based advisors, they offer transparent, easily understandable pricing that is not attached to the sale of any product. Which means they have no incentive to recommend an investment that would yield higher commissions to them. Instead, most independent RIA firms base their fees on a percentage of assets managed. Which gives the advisor an incentive to safely and appropriately grow the client's assets.
But just because RIA's are held to a higher standard doesn't mean there will never be a conflict of interests. For example, if a client wants to make a sizable donation to charity, the donation will mean that assets under management will be reduced which will, in turn, reduce that advisor's fees. An ethical RIA, of course, will always give advice that is in the best interest of the client even if that advice isn't in his or her best interests or the firm's.
So how does one go about finding a source of accurate and unbiased financial advice that is also highly ethical?
Many sources suggest seeking a firm that is independent, honest, transparent and demonstrates a sense of duty – not to mention an absence of greed. A firm, in other words, with a rock-solid reputation. The best way of finding such a firm is generally through the recommendation of satisfied clients, though the Internet is a good place to start the search process.
Once you have found a firm like this, arrange a visit to its offices and meet the principals. Don't hesitate to ask questions, it's your money at stake. You might want to know if their recommendations are planning centered ... if you can withdraw your funds at any time ... and if their advisors are Certified Financial Planners. And you want to be crystal clear about their fees.
Above all, make sure their values compliment yours ... that the "chemistry" is right ... and that you feel comfortable with your Financial Advisor.
You want to leave feeling that when you get advice from that firm, it won't be just good advice. It will be good for you rather than for the firm.