Like most of our blogs, this one was born out of a real experience that initially may seem totally unrelated to your financial life. But trust me, it somehow circles back to it.
For quite some time, when I was driving, I would sometimes find myself looking down at my turn signal since it sounded like it was on. Yet every time I looked down, it was off. What was that noise I was hearing? Was my car playing tricks on me? Finally, it all connected when I discovered it only happened when the song “World in my Eyes” by Depeche Mode was playing on the radio. In the background, there was a beat, in the same tone and rhythm of my turn signal. This was the intermittent sound that made me think my turn signal was on. Mystery solved.
For how this relates to your financial life, it is important to know the difference between the types of advisors. Someone whose primary objective is to sell you something can use the same tone, words and phrases as someone acting in your best interest but with the outcome being entirely different. There has been a lot of controversy in the news lately about the concept of fiduciary duty. The fiduciary duty requires your advisor to act in your best interests instead of that of their company or themselves. Many people are shocked to learn that their advisor isn’t required and often doesn’t put their best interests ahead of themselves or their company.
Determining whether an advisor should be a fiduciary is a rather simple task; just ask them. Unfortunately, the financial industry works hard to confuse the matter. Many times, you’ll hear an advisor is dually registered, which means sometimes they act in your best interest and other times they act in the interest of their company. How do you know when they switch roles? One such way is to ask, “Are you a fiduciary at all times?” This is a straightforward question and should have a straightforward answer.
Another question would be “Are you limited in the specific stocks or funds that can be placed in my portfolio?” Some firms use proprietary funds or funds that pay the firm to place them. If you are limited to a certain number of fund families, ask why. You wouldn’t want to go to a physician who only prescribed medications from pharmaceutical companies that paid them, so why would you take that risk with your financial life?
It is important your advisor is properly trained and has an appropriate background when giving advice. Everyone has to start somewhere but they need the proper training before taking your financial life into their hands. While years of experience is good and helpful, you also want to ask about continuing education. Is your advisor keeping up on the latest planning techniques and issues affecting the industry such as tax or estate law changes?
Choosing the right advisor can be a daunting task: it requires time, thought and due diligence. Interview several before you choose and don’t be pressured into signing up immediately. Take your time and make sure the tone, words and phrases are the real thing.