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To help protect themselves from being taken advantage of by financial sales professionals, retirees should ask the following questions about the financial professional seeking to provide investment advice or sell them an investment product:
“Are you a trustee and how are you registered?”
“This question is critical, as advisors can be dual-registered and operate as a broker AND a trustee, although they will still tell you they are a trustee,” says Eric Presogna, owner and CEO of One-Up Financial in Erie, Pennsylvania. . .
For more than two decades, the Securities and Exchange Commission (“SEC”) has allowed brokers to register as investment advisers and provide both types of services. Potential customers often find this dual capability confusing, but the difference is significant. SEC-registered investment advisers are required to act in a fiduciary capacity, while brokers do not have a similar obligation. Why is this distinction important?
“Advisors who have a fiduciary duty to their clients must put their clients’ best interests before their own at all times,” says David Rosenstrock, director and founder of Wharton Wealth Planning in New York City. “Many people are surprised to learn that this obligation is not required of all advisers. In fact, most advisors are not required to act as fiduciary in all of their interactions with a client. Non-fiduciary advisers often follow the adequacy standard, but that only requires that they provide clients with advice deemed “appropriate” for their situations; therefore, it offers fewer protections/safeguards to customers. The term fiduciary is not yet widely known and understood.
If you’re not sure what “fiduciary” really means, and it’s unclear what kind of professional service your potential service provider plans to offer, there are other avenues you can take to ensure that the provider is legally bound to always act in their best interest. interest. To determine this, you’ll need to dig a little deeper into the person’s certifications and licenses.
“Some red flags that an adviser isn’t always acting as a trustee include a Series 7 license and a Series 63 or 66 license,” says Rosenstrock. “If a financial adviser has a Series 7 license, that person can charge commissions on the sale of investments, which means that the professional is not always acting in a fiduciary capacity. A Series 63 or 66 is another license that a financial adviser needs to charge commissions for the sale of products.
“How long have you been doing this and what are your qualifications?”
Many advisers rely on word of mouth advertising because it implies an endorsement from the sender. While this may seem ideal, it doesn’t mean you shouldn’t do your own due diligence. After all, just because someone is friendly doesn’t make that person competent.
“It’s important for a retiree to understand the professional background and qualifications of the financial professional looking to sell them an investment product,” says Garett Polanco, CIO of Independent Equity in Fort Worth, Texas. “This can help the retiree determine if the professional is knowledgeable and competent in the field and can be trusted to provide good financial advice.”
If the professional is a registered investment adviser, you can do your own research on the individual or company. going to the SEC website. For brokers, you will need to go to a different website.
“If the adviser is a broker, check the broker’s credentials in FINRA Broker Verification Websitesays Coconut Creek-based financial author Craig Kirsner. “Also, look at the broker’s website and search for the broker online. Does the broker seem to have a good reputation? If there are many people with the same name as the broker, use quotation marks around the name to limit the search. Consult the broker with the Better Business Bureau. Also, go to the broker’s Google Maps location and see what reviews are there.”
“Where will my money be kept?”
Bernie Madoff got away with it for so long because he not only invested the assets, but he provided all the reporting on those assets. To maximize his security, he would prefer that the custodian holding his assets be a different firm, separate from the advisor’s firm.
“You should ask where the money will be kept,” says Kirsner. “Make sure it is in the hands of a reputable company or a large, highly rated company. Make sure you have access to view your funds at this firm and only write the check made out to that firm.”
“How are they paid? Are there other costs that I will pay?”
Speaking of writing checks, never sign the dotted line until you know not only how much the adviser is getting paid, but also what their out-of-pocket rates are for any product the adviser may place you on. (Note: Products may include mutual funds, insurance contracts, and anything other than stocks and bonds.)
“It’s important that you understand the costs involved in any investment product, including fees and commissions,” says Polanco. “This can help you determine if the product is a good value and if it aligns with your financial goals.”
Don’t be fooled by mutual fund expense ratios. These are not out-of-pocket expenses and are already incorporated into the return data you see from the mutual fund company. It is similar to a stock return that already includes the operating costs of that company. What matters are transaction costs and holding fees, which are not part of the operating costs or expense ratio. These can add up and put more pressure on the performance of your investments.
“Most of the issues are related to cost, which creates a high hurdle rate for the underlying investments to liquidate before the investor makes any decent money,” says Stephen Taddie, a partner at HoyleCohen, LLC in Phoenix. “By that I mean if the cost of the product is 3% per year, the underlying investments must earn 7.50% for the investor to net 4.50%, which by comparison is currently available on a Treasury bond. from the US to 10 years. If the product is touted as capable of producing a 6-8% rate of return, then the underlying investments must produce 9-10% for that to happen. Follow-up questions regarding investments would focus on understanding how investments will earn that rate in this environment. Often the risk taken within the product is more than you would take on your own in individual securities.”
“What is your investment philosophy?”
Finally, and to continue Taddie’s implied line of reasoning, you should explore the particular style of investing practiced by the adviser you are considering.
“Your advisor should review all the key components of financial advice, such as how, when, where and why to invest in what,” says Bruce Mohr, a senior investment advisor and credit consultant at Fair Credit in Decatur, Georgia. “A good investment strategy and a track record of good investment management are requirements for a financial advisor. Your overall financial health is highly dependent on your investments, so you should be dealing with an advisor who employs strategies you are comfortable with. They must be able to adequately describe their investment philosophy, plan and guiding principles using an evidence-based approach. For example, I believe that diversification is important and that investing for the long term is the best”.
If you invest in products rather than individual stocks and bonds, you’ll also want to make sure there are no restrictions, redemption fees, etc. or other repercussions if you decide to terminate the relationship with the adviser and liquidate the investments that the adviser has placed with you.
