In selecting or retaining a financial advisor, how do you know if you’re making a wise choice?

This is a challenging subject, indeed. 

First, the stakes are high. The quality of your selection, or lack thereof, can literally make or break your family’s fortune. 

Also, the choices can be bewildering. It can be difficult to determine what to look for and who to trust. 

Let’s cut through some of the confusion with three essential steps for finding an advisor who is a good fit for you and your wealth: 

1. Understanding the advisory environment 
2. Addressing the decisive details
3. Doing your due diligence 

Note: We recently updated this article to reflect the current environment. It was originally published in February of 2015. If you read the original article, we hope you'll notice that our core values have not changed. 

Part 1: Understanding the Advisory Environment

First, There Is Fiduciary

In the medical profession, physicians practice according to a familiar standard: “First do no harm.” It seems there should be a similar level of commitment for anyone who wants to advise you about your financial well-being, right?

Unfortunately, not always. Financial advice remains subject to troublesome double standards. It’s still up to you to spot the subtle differences, and heed the quality of advice accordingly.

Red tape and legal jargon aside, we suggest seeking advice that exemplifies a few simple ideals:

“There’s no confusion in the minds of investors as to what they want. They’re very clear. They want somebody they trust who makes recommendations that put their interest first and don’t allow the advisor to profit financially at their expense.” 

— Phyllis Borzi, Dept. of Labor EBSA head, 2009–2017

That makes sense, doesn’t it? There’s even a term the investment world has been using since at least the 1940s to describe this highest standard. It’s called fiduciary advice. 

Why Fiduciary Advice (Still) Matters

Fiduciary advice makes sense to us too. Investors deserve nothing less than the fairest possible shake from anyone entrusted with advising them about their personal wealth. For decades, the fiduciary standard – in contrast with a lesser “suitability standard” – has shaped this highest level of care for those of us committed to delivering it. 

However, to our frustration, a 2020 Securities and Exchange Commission (SEC) overhaul has downplayed rather than strengthened the fiduciary standard. The SEC has overlaid fiduciary duty with new industry protocols, paradoxically called Regulation Best Interest (Reg BI). 

Despite its promising name, Reg BI may muddy what clarity had existed between higher and lesser standards of advisory care. By attempting to apply the same broad rules to financial providers of every stripe, Reg BI threatens to discount the still-stark differences between them. 

In theory: Anyone offering investment recommendations is supposed to minimize their conflicts of interest, and disclose any inherent conflicts they cannot eliminate. 

In reality: Not all financial advice and investment recommendations are created equally: 

Even if a broker-dealer is doing their level best to recommend sound investments, they are unlikely to be aware of the intricate interplay among your total wealth interests. Without that critical context, how can they know whether a particular recommendation is truly best for you and your bigger picture? 

Practicality speaking: Investors must still sort out what else may be driving stand-alone recommendations. While legal disclosures can help, when is the last time you read one, and understood what it meant (or asked probing questions until you did)? For most, it’s been a while. As such, disclosures alone may fail to protect investors from falling for sales pitches in disguise.

Interested in learning more, read our separate, more detailed report, “Advice or a Salespitch?”  

Part 2: Addressing the Decisive Details

Beyond accepting fiduciary duty, there are other important qualities to seek from an advisor who is willing and able to sit on the same side of the table as you and your highest financial interests. These qualities include their:

• Business structure
• Regulatory agent
• Compensation arrangements
• Investment strategy
• Custody arrangements

Business Structure: The Registered Investment Advisor Firm

By law, independent Registered Investment Advisor firms (like Open Window) must provide strictly fiduciary advice to their clients across everything we do for you. In contrast, brokerages, banks, insurance agencies and other transactional businesses are not primarily in the advisory business. A broker’s primary role is to transact trades; a banker holds accounts; an insurance rep sells insurance. Stand-alone investment recommendations are secondary to these roles, and not all of their services are subject to a fiduciary standard of care.

Regulatory Agent: Seek SEC or State Oversight

A short-hand approach to help differentiate an independent Registered Investment Advisor from others is to identify which regulator oversees the firm.

• Registered Investment Advisor firms are regulated by either the SEC or their state (depending on firm size as measured by assets under management).
• Brokers are regulated by the Financial Industry Regulatory Agency (FINRA).

Compensation Arrangements: Is Your Advisor Fee-Only?

Another way to tell how well your advisor’s interests are aligned with yours is by determining their sources of compensation.

Is your would-be advisor or their parent employer receiving commissions or other incentives from third-party sources (i.e., not you)? Even if these arrangements are disclosed in the fine print, your relationship can become tainted by incentives that have nothing to do with you and your best interest.

Why accept an awkward arrangement, when it can be easily eliminated by working with a fee-only advisor? A transparent, fee-only relationship ensures your advisor is on your “team,” and nobody else’s. They’re best positioned to offer the impartial, product-neutral advice you deserve.

A fee-based advisor warrants further inspection. Fee-based advisors are receiving your fees, plus commissions from others. If the advisor is entirely fee-only, except they can write insurance policies for you as needed to protect your primary investments (with full disclosure of all commissions being received for this singular activity) then a fee-based relationship may still complement your best interests. If the commissions are instead coming from investment activities, the same conflicts arise as those described above for a fully commissioned advisor.

Investment Planning and Execution: How Stable Is the Strategy?

How is your advisor managing your money?

• Do they offer a written Investment Policy Statement that documents your personal financial goals and your strategies for achieving them?
• Is your portfolio structured according to decades of robust evidence indicating how to capture long-term market growth according to your personal goals and risk tolerances?
• Is the strategy implemented with efficient, low-cost solutions that use this same evidence?
• Are your assets being considered as an integrated whole, whether directly under your advisor’s management or held in outside accounts such as your company’s retirement plan?

Look for a comprehensive investment approach your advisor can integrate into your total wealth and overall financial interests.   

Custody Arrangements: Insist on Independence

Even if your advisor checks out so far, there’s one more way to safeguard your interests. After all, Bernie Madoff looked fine on paper before he was exposed as a smooth-talking criminal.

To protect yourself against scoundrels, your money should be held in your name at a fully independent custodian that reports directly to you. For example, here at Open Window, 100% of client funds are held at an independent custodian. 

Ensuring your money is held at a separate custodian affords you the opportunity to review your financial statements, sent directly from the custodian to you. (In contrast, Madoff maintained custody of his clients’ accounts at his New York brokerage house, enabling him to falsify their reports.) It also lets you log into your account anytime to keep an ongoing eye on your assets. 

Part 3: Doing Your Due Diligence

So, how do you recognize good financial advice in a crowded field of look-alikes?

Narrow the Field

First, to summarize what we’ve covered so far, here is a handy checklist you can use to narrow down your search.

A Checklist for Identifying an Ideal Advisor

Ask the Advisor 

Checklist in hand, any reputable advisor should relish your deep, candid questions, no matter how detailed or direct they may be. If the response seems incomplete, confusing, defensive, or otherwise lacking, this may indicate a poor fit, even if everything else checks out fine. 

Here are three good questions that cover a lot of ground:

1. Will your relationship with me be only and always as my fiduciary advisor? Take no less than an unqualified “yes,” with no ifs, ands, or buts.
   


2. Can the same be said for your entire firm and its full range of services? Some firms may have a mixture of services, with employees who are dually registered. This means some of their services are dispensed with broker/dealer hats on, while other times they are acting as your advisor. It may be unclear when and whether they’re working for you or their employer.
   


3. Will you and your firm agree to a fiduciary relationship in writing? How reliable are verbal assurances if you can’t get them in plain writing? For example, here are three sources for simple but powerful language you can use to craft a fiduciary oath. In our estimation, any advisor worth heeding should be willing and able to sign such an oath.
• The Committee for the Fiduciary Standard Fiduciary Oath
• The Natl. Assn. of Personal Financial Advisors (NAPFA) Fiduciary Oath
• The Institute for the Fiduciary Standard Code of Ethics

Check the Advisor’s Records

The financial industry is highly regulated, with required disclosures to describe a firm’s conflicts of interest, how they are compensated, whether they’ve had past “incidents,” and more. 

Since these reports exist, we highly recommend taking advantage of them. 

Form ADV: 

Whether registered with their state or the SEC, Registered Investment Advisor firms of any size must file a Form ADV, found on the SEC’s Investment Adviser Public Disclosure website. The firm’s ADV “Part 2 Brochure” and  ADV “Part 3 Relationship Summary Form CRS” are good places to start, since the official Form ADV (which we call Part 1)  tends to be more technical. 

FINRA BrokerCheck: 

Most advisors should also be listed in FINRA’s BrokerCheck, where additional details and disclosures may be found. (Although the name suggests it’s a repository for broker disclosures, the resource actually reports on both advisors and broker/dealers.)

Form CRS:

Many firms must also now publish a Client Relationship Summary, or Form CRS, with additional, simplified disclosures. Under Reg BI, there are two groups who must file these: (1) broker/dealers offering incidental investment recommendations and (2) Registered Investment Advisor firms registered with the SEC. Most smaller, state-regulated advisors are not yet required to do so. A firm’s Form CRS should be available on its website, or you can request a copy of the same. Here is a link to ours.

Professional Affiliations: 

Does an advisor hold professional credentials, such as a CFP® mark? Some organizations provide consumer-facing reports on their membership. You can view ours here (Joe, Eric).

Google:

You can also deploy your favorite search engine to see what the virtual world has to say about an advisor and their firm. Especially if a name is relatively common, make sure you’ve got accurate hits. And remember, some sources will be far more reputable than others.

Finding Your Right-Fitting Advisor: Coming Full Circle

Finding Your Fiduciary Financial Advisor

So, in selecting a financial advisor, how do you know if you’re making a wise choice?

First, make sure they will uphold a fiduciary duty to you across your entire relationship … and will agree to that in writing. Use our checklist to determine whether the advisor is well-positioned to sit on your side of the table.

Also review their background, asking critical questions. Take advantage of the advisor’s Form ADV, Form CRS, and other resources to facilitate your due diligence.

Beyond that, look for someone you get along with on a personal level. If you and your advisor don’t “click,” even good advice may be hard to take.

To learn more about Open Window we invite you to access our Form ADV and Form CRS. We offer an evidence-based investment strategy guided by your highest financial interests and total wealth care. We are proud to be a fiduciary, fee-only Registered Investment Advisor firm.

Together, let’s explore your financial possibilities. We look forward to answering any questions you may have.