Sometimes, finding the right person to help you with your money management can be difficult. This is especially true when you’re looking for an investment manager to help you grow your investment portfolio.
One of the biggest issues that I’ve noticed between prospective clients and their investment managers is that the clients often don’t know much about the person they’re trying to hire.
Considering that financial services such as investment management are incredibly important in preparing for retirement, I thought I’d share some things that most people don’t know about investment managers here:
1: Your Investment Manager Might Not Know as Much About Investing as You Might Think
The person that you’re relying on to make sound investment decisions to grow your portfolio’s value might not know much more about the stock market than you do. This is a distressing thought for many.
I recently came across a Forbes article that highlights the problem rather well: “Consumers need to be aware that some advisors are primarily relationship managers. They manage the relationship with the investor, respond to client requests, and recommend and sell products.”
While not true of every investment manager, this is an issue that needs attention. If your investment advisor is more of a relationship management specialist than an investment or money management specialist, that could mean trouble for your investment accounts.
How can you tell which is which? One warning sign that you can look out for is whether or not your investment advisor makes commission on the products they sell to you. If they’re getting money from another company, then there may be a conflict of interest providing them motivation to sell you the products that provide them a bigger commission rather than giving you the best advice to fit your needs.
2: A Broker Has NO Legal Obligation to Suggest the Best Investments for Your Situation, Only Ones That Are “Suitable”
Another fact mentioned in the Forbes article that many investors may find distressing is that “brokers are under no obligation to suggest investment vehicles that are in your best interest… By regulation they only need to recommend ‘suitable’ products based on factors consistent with your age and risk tolerance.”
What does this mean, exactly? Well the distinction can be fine, but an example might be that if the broker had to choose between two different products that were similar, but would provide him different commissions, he is free to pick the investment that gives him the biggest commission, even if it is more expensive for you.
Compare this to a financial services provider who is held to the fiduciary standard, such as a registered financial advisor. These individuals are legally bound to put your financial best interests first.
When considering a financial services provider, ask them if they are required to act as fiduciaries. This can help you avoid the potential conflict of interest that exists with those who earn commissions.
3: True Fiduciaries Have to Provide You with a Form ADV Part II—AKA the Plain-Language Explanation of an Investment Manager’s Compensation Sources
Here’s one thing that you might never have heard of unless you’ve worked in finance as a fiduciary; the Securities Exchange Commission’s form ADV Part II. This form, among other things, requires an investment advisor to “Write your brochure and supplements in plain English, taking into consideration your clients’ level of financial sophistication” and “make full disclosure to your clients of all material facts relating to the advisory relationship.”
In short, financial advisors are required by law to have a document that lays out all of their fiduciary status and responsibilities that is written in plain English, stripped of all the confusing legal jargon and double-talk that makes reading legal documents so frustrating.
This form can tell you what the advisor’s sources of compensation are, such as commissions they may earn or the fees they charge for specific services and situations.
If you’re having trouble telling if a financial services provider is a fiduciary or a broker, ask for their Form ADV Part II. Going over the document with the advisor may be helpful in determining if they’re a broker working for commissions, or a fiduciary with a legal requirement to look out for your best interests.
This is important since both brokers and fiduciaries may use the same job titles, such as financial advisor or investment manager, which can lead to confusion.
This is important since both brokers and fiduciaries may use the same job titles, such as financial advisor or investment manager, which can lead to confusion.
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