Last year, the US Department of Labour announced a new fiduciary rule, which would require investment advisers to put client interests above their own when it comes to overseeing retirement accounts.
But that decree may never see the light of day. President Donald Trump signed an executive order February 3 giving the new White House time to review the rule, which administration officials have indicated they aim to rescind.
The White House move was met with mixed reviews. Massachusetts Sen. Elizabeth Warren took aim at the executive order, saying it would “make it easier for investment advisers to cheat you out of your retirement savings.”
However, finance industry executives say the fiduciary rule would have limited choices for investors. “We think it is a bad rule. It is a bad rule for consumers,” Gary Cohn, the former COO of Goldman Sachs who is now Trump’s chief economic adviser, told The Wall Street Journal. “This is like putting only healthy food on the menu, because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.”
It’s important to remember that regardless, the fiduciary rule would only affect retirement accounts. Which means that for any other investments, not every financial adviser is required to always act in your best interest. Those not working to the fiduciary standard are held only to a suitability standard, meaning their advice must be suitable for the clients’ financial situation, but is not necessarily in their best interest. For instance, brokers operating under a suitability standard might let the commission attached to a product influence their recommendations.
“When you think about it, it’s amazing how much control financial advisers have over our lives,” writes Liz Davidson in her book, “What Your Financial Advisor Isn’t Telling You.” “Choose one who is actually a criminal, and it is possible to lose your entire nest egg.”
That being said, you shouldn’t just write off financial advisers completely.
“To completely eschew using an adviser can be as big a mistake as picking the wrong one,” Davidson says. “When you need financial advice, they can be a tremendous help — it’s just a matter of finding the best one for your situation (and being able to spot the Bernie Madoffs of the world before you hand over your life savings).”
To help you sniff out the good from the bad, we rounded up 15 questions to ask prospective advisers, from the Department of Labour’s guide for consumers on how to tell if your adviser is working in your best interest:
Do you consider yourself a fiduciary?
A fiduciary has a legal duty to act in your best interest and can be sued for taking actions otherwise.
Those not working to the fiduciary standard are held only to a suitability standard, meaning their advice must be suitable for the clients’ financial situation, but is not necessarily in their best interest.
“Very few financial advisers hold themselves out to be fiduciaries, and even fewer will sign an agreement that states, in no uncertain terms, that they are operating in a fiduciary capacity as your adviser,” Davidson explains. “However, if you can find one who is willing to do this, you are automatically putting yourself in a safer position.”
More specific questions you can ask:
• If not (a fiduciary), why not?
• Are you willing to act as a fiduciary with a duty to act solely on my behalf?
• Are you willing to disclose to me any conflicts of interest that may interfere with your acting solely on my behalf?
• Are you willing to put this commitment in writing?
It’s important to be specific when asking about whether or not they’re a fiduciary, since many advisers are dually registered as a broker (only subject to the suitability standard) and a fiduciary. Dually registered advisers can switch roles, thereby blurring the broker-fiduciary line.
As Harold Pollack and Helaine Olen explain in their book, “The Index Card,” “You need to ask and ask quite specifically: Do you work to the fiduciary standard at all times? This last part, ‘at all times,’ is important. As the fine print on brokerage forms indicates, the fact that an adviser commits to a fiduciary standard for some of her dealings with you does not hold her to this standard in others.”
How are you compensated?
This is one of the most important questions to have in your back pocket. Unbeknownst to many, a lot of advisers earn commissions by recommending certain financial products and services to you.
“The problem is that this system incentivizes advisers to sell high-fee investments, annuities, and insurance,” Davidson explains. “High-fee mutual funds, annuities, and insurance policies typically perform worse than lower-fee options because the fees eat into your return.”
You’ll want to ask your adviser if they’re allowed to sell investments outside of what their employer offers, Davidson says: “If the answer is no, chances are that you should decide not to limit your financial success by working with these advisers. If the answer is yes, find out exactly how selling outside investments affects each adviser.” For example, will they get a lower commission for selling outside investments?
More specific questions you can ask:
• Do you earn fees or commissions based on the number of products that I buy or the size of my investment?
• Will you earn a higher fee or other type of compensation if I invest in certain products you recommend or will you receive fees for services related to specific investment products?
• Will you provide a list of the fees and commissions you receive either directly from me or from other sources in writing?
Are you a licensed or registered investment adviser?
“Financial planning requires proper training,” Davidson explains. “Like a surgeon who is not properly trained and prone to make mistakes, your financial adviser may simply not have the training, knowledge, or experience to deliver sound advice to you.”
Davidson recommends looking for an adviser with at least 10 years of experience in financial planning and who has a CFP (certified financial planner) designation, which is considered the “gold standard” for financial planning. To give you an idea of the training required for this designation, “the pass rate for the exam to become a CFP certificant is about the same as the pass rate on the bar exam that law school grads are required to take in order to practice law,” she explains.
Ask your adviser about their experience and certifications — and then verify it. Davidson recommends using www.finra.org: “Type your adviser’s name into the FINRA database and you’ll learn what securities licenses this person actually has and, even more important, whether or not any complaints, disciplinary actions, suspensions, or very frequent changes of employment appear on his or her record … You’ll want to see a completely clean record … Even a single complaint, and certainly any disciplinary action, is a major red flag.”
More specific questions you can ask:
• Are you registered with the State, US Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), or the CFP board?
• For how long? What is your experience?
• Who supervises you, or, are you a sole practitioner?
• If a sole practitioner, do you have professional liability insurance?
• Have you (or your firm) ever been disciplined? For what?
Read the DOL’s full guide for consumers on how to tell if your adviser is working in your best interest.
This is an update of a story originally written by Kathleen Elkins.