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How to Know If Your Best Interests Come First

“Fiduciary” certainly is a popular buzzword. The word is touted – perhaps even over-used within the financial services industry – as advising professionals claim its status and clients are left to wonder if the promises associated with fiduciary will hold true in their investing experience.

A fiduciary is defined as one that puts the interests of others (clients) ahead of his or her own needs. In the world of financial advising and investing, fiduciary means guiding clients toward investments that are best for the client even if the compensation for the advisor isn’t the best.

Yet, as the federal government dabbles in and out of the fiduciary definition, its actual understanding in the marketplace gets jumbled.

Here are some ways that advisors and clients can size up whether or not their relationship is one of a fiduciary nature.

Put Fiduciary in Writing
It is one thing to tell clients you are a fiduciary; it is a completely greater commitment to put that in writing.

So believes Clinton Cannon, CEO of Cannon Capital Management, Inc., based in Cottonwood Heights, Utah. He suggests clients request that the word fiduciary and its definition be included in contracts the client enters in with the advisor.

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Acknowledging that the financial services industry is full of jargon – including the way that advisors are labeled – Cannon believes it is in the best interest of the client to have a written record of all work that should be and is done on his or her behalf contained within a written, legally-binding contract.

Cannon is a registered investment advisor (RIA) and as such he knows he is held to a higher standard of client accountability – he does what is in the client’s best interest – even and especially when it may not be the best for his bottom line.

Having this type of commitment written into a working contract is what he believes to be a distinguishing hallmark of a true fiduciary.

Recommends To You What He or She Has
In a financial twist on “what is good for the goose is good for the gander,” it is perfectly legit that what is good for the advisor’s portfolio is good for the client’s as well.

“Ask your financial advisor if he or she is recommending for your portfolio what he or she has in their portfolio,” says Andrew Aran, a partner with Regency Wealth Management in Ramsey, New Jersey. “Better yet, ask if they would buy these for their own mother or grandmother.”

Their emotional reaction to that question is a tell-all, he said.

Depending on how your personal financial situation compares to that of your advisor, you may not be best suited for each and every investing choice the professional made for himself or herself, but you may fit into some of the same investments.

The advisor’s responses to these questions reveal much regarding their approach toward your investing needs.
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Fred Wollman, owner of Wollman Wealth Designs in Escondido, California in the greater San Diego area, agrees with Aran. He suggests clients tell a potential advisor who they are interviewing that they will only invest in the same securities that he or she has their personal money in.
“Then,” Wollman said, “Be prepared to look them in the eye and ask for proof.”
In other words, don’t be shy. Require a look at the advisor’s statements, Wollman said.
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Use Your Own Network

Start with what you know when trying to identify a fiduciary advisor.
Most everyone has a tax professional or an attorney they prefer – ask them who they would recommend.
That’s a move Wollman plugs.

“Skip the Google search and the marketing dinner seminars,” he advocates. “Get an introduction from your CPA, your attorney or another professional you know well that you’ve had a long-term relationship with and who has a long-term relationship with an established advisor. You have a much better chance that advisor will act as a real fiduciary.”

Ask for Federal Proof
Advisors that are RIAs are required by the federal government to annually file a document known in the regulatory world as the “ADV Part 2.” ADV is the abbreviation for “Advisors Public Disclosure.” It is a form filed on the federal level with the U.S. Securities and Exchange Commission (SEC) and on a state-by-state basis with the appropriate agency within each jurisdiction.

As of 2011 – post the 2008 housing bubble burst and the Bernie Madoff-type scandals – the SEC established Part 2 of the ADV requiring RIAs to prepare a narrative brochure statement describing: the advisory services offered, a fee schedule outline, details on any disciplinary actions taken against them as well as any conflicts of interest, plus the educational and business background of all key advisory personnel within the firm. This represents a significant bump up in the amount of information the federal government required in the past.

Previously, the original ADV contained limited information: the name of the business, ownership, clients, employees, business practices, affiliations and any disciplinary events of the advisor or its employees were also included.

These filings are readily available to the public online at the SEC website.

The SEC also offers a free pamphlet, “Investment Advisers: What You Need to Know Before Choosing One.”

Scott Coles, founder and president of WMBC based in Lake Forest, California in the foothills south of Los Angeles, said clients shouldn’t have to go to federal websites to get a copy of the ADV. He believes an advisor ought to provide the document without even being asked to do so.

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Clients are supposed to receive this information upon accepting the offer made by an advisor for planning. Coles thinks potential clients ought to see the documentation as early as possible in the interviewing phase. Additionally, an annual update of this document is also supposed to be provided to clients. If that isn’t happening or an advisor balks at this request, Coles theorizes that might be a red flag.

Check Industry Sources
The alphabet soup of initials following an advisor’s name can be confusing to newcomers to the financial services industry. Yet, they represent certifications that can tell us the level of fiduciary care an advisor provides.

As previously indicated, RIA is an acronym a client wants to see behind an advisor’s name if fiduciary services are being sought. Other desirable abbreviations include CFP® (Certified Financial Planner), ChFC® (Chartered Financial Consultant), CIC (Chartered Investment Counselor), CIMA (Certified Investment Management Analyst) and EA (Enrolled Agent).

An EA has passed three intensive exams from the Internal Revenue Service earning the agency’s highest credential. The federally authorized tax practitioner is then qualified to represent clients in a tax dispute – most certainly a position for which fiduciary standards are preferable.

George Smith, co-CEO of Smith-Bruer Advisors, an RIA firm in Tallahassee, Florida, has a few other recommendations for verifying fiduciary status of an advisor.

First, research an advisor’s listing on the National Association of Personal Financial Advisors, he suggests. Membership in this organization requires an advisor to be compensated on a fee-only basis.

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Tone of the Interview
Even when an advisor is registered as a fiduciary, the tone of the interview will give you, the potential client, numerous clues as to whether the particular advisor is the best one to look after your interests.

For instance, an advisor that doesn’t take the time to learn more about your goals and time horizon before talking about which investments to place you in might not be the right one for you, suggests Coles.

“Is the advisor looking to place your investable money without structured planning, or are they more concerned about knowing your tax needs and how your income is received so they can plan for a positive experience in your overall financial picture,” Coles said.

If the initial conversation is more about the advisor than it is about the client, Coles advises setting up an interview with another advisor.

Take the Pledge
Finally, ask your advisor if he or she takes the pledge.

Peter Lazaroff is the co-chief investment officer at Plancorp based in St. Louis, Missouri, with offices in Nashville, Tennessee, and Sarasota, Florida. His entire career has been devoted to the fiduciary concept and he regularly writes about it via his blog at PeterLazaroff.com. He is also a major contributor to BrightPlan – the first hybrid robo-advisor to be fiduciary certified by the Centre for Fiduciary Excellence.

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