If you work with a professional money manager or advisor it’s possible that you have some things that you would like to know but you probably feel are “weird” to ask.  It’s not that many of the things that you may want to know are secrets as much as much of the financial services world still lives by the code “don’t ask, don’t tell”.  Even without increased regulation, demographic changes are causing this once sacred barrier to be broken down.  I’m sure much of the mystique may have been related to an advisor’s inability to fully explain an investment or his compensation at one point in time.  Regardless of why and how, it seems only natural that over time the barrier that has been erected prevents transparency from reigning in the relationship with clients.  This week, I’ll attempt to correct some, although validly drawn, misplaced notions about advisors that I’ve heard clients mention before.  So for the sake of investors working with financial professionals all over the globe, let’s delve into some things you may want to know.

Q. What licenses do you need to practice and how are you regulated?

A. Hopefully this was one of the first questions you asked your guy or gal before you began a relationship.  Impersonating a financial professional is possible, just ask Bernie Madoff’s victims.  This has the potential to be a long answer so I’ll be brief.  There are two main regulatory agencies for financial services professionals:  the Financial Industry Regulatory Authority (FINRA) and the Securities Exchange Commission (SEC).  The former largely regulates broker-dealers (e.g. individuals that charge “commissions” for products and services they deliver), whereas the latter regulates registered investment advisers (or RIAs)–individuals that charge “fees for services”.  The main difference is the standard by which FINRA and SEC regulate.  FINRA uses what most industry experts believe to be a lesser standard by determination if a product or service is “suitable” for a client, whereas the SEC imposes the “fiduciary” standard.  Fiduciaries are charged to operate in the best interest of the client.  FINRA has several licenses that professionals can obtain with the most common being the Series 6, 7, 66–these allow financial professionals to use virtually any product to construct an investment portfolio.  IMPORTANT:  No licensure is required if an individual just wanted to hang a shingle and call himself a financial advisor.  However, he would be hard pressed to put you in a mutual fund or stock without being affiliated with one of those two organizations.

Q. How are you better than a robo-advisor? Can’t I save on fees by using one?

A. The quintessential subject of fees is something that deserves some attention.  So I will attempt to be thorough without being wordy.  First, robo-advisors are platforms that allow investors to set an investment mix and leave it alone.  Usually a periodic contribution can be made to the account for systematic investment.  These platforms usually allow for investments as little as $1000 to get started and waive the first several thousand in fees for assets under management. The caveat is that in exchange for a more efficient investing mechanism with lesser fees, you also get less personal attention.  In almost twenty years in the industry, I’ve met few clients that want less personal attention.  Typically as assets grow, the more attention that is needed as choices become more numerous along with wealth consequences like taxes and estate planning.  So, robo-advising seems appropriate for a certain type of client up to a certain point in life.  Advisory fees should be treated like anything else.  They should be negotiated upfront and discussed fully so each party (client and advisor) understands what benefit is being received.  Advisors conduct difficult analysis and draw on years of experience in order to deliver consistent, meaningful solutions for their clients.  Clients work hard for many years to accumulate enough savings to live a dignified lifestyle after earnings from work stop.  Each should understand the benefit being received by the relationship.

Q. How often are you reviewing my investment plan?

A. I’ve somewhat covered this in a previous post, but I’ll add a bit more detail.  At the relationship’s inception, each advisor should construct a guiding document for how the portfolio will be constructed and investment objectives.  Length is not as important as agreement by client and advisor as to the plan’s contents.  A review of this document (or at least what it expressed) should happen regularly.  The frequency should be mutually agreed also, but semi-annually for individual investors and annually for institutional investors is probably the bare minimum.  With everyone living more complex lives, investment plans need to be dynamic, fluid documents instead of static.

There are obviously other questions that I cannot cover in just one post.  However, feel free to inbox me if you have one that you are afraid to ask!

Invest Wisely!