Your financial adviser is someone you need to trust, and the foundation for that trust is knowledge. You need to know exactly who you’re working with, what standards they are held to and how they are making their money.
Even if you think your adviser is being upfront, don’t just trust them at their word. It’s imperative to learn as much as possible, because a lack of financial knowledge can result in mismanagement or even fraud.
Here are seven secrets your (or a potential) financial adviser may not tell you:
1. Many advisers are allowed to put their interests ahead of yours
While there are some financial advisers who operate under a “fiduciary” duty, which is to act in a client’s best interest before their own profits, many others still operate under a suitability standard, which limits their liability when giving advice to you (learn more by reading “7 Questions to Ask Before Hiring a Financial Adviser”).
According to a 2019 Financial Trust Survey (opens in new tab), “Nearly half of Americans (48%) incorrectly believe all financial advisers have a legal obligation to act in clients’ best interests.” This is disturbing as many are assuming that their financial advisers are exercising the duties of: 1.) loyalty; 2.) good faith; and 3.) due care. “Loyalty” means putting a client’s best interests before their own; “good faith” is to act honestly; and “due care” is to employ skill.
The U.S. Department of Labor’s (DOL) Fiduciary Rule began to go into effect in June 2017, but before it could be fully implemented, a court ruling effectively killed it in 2018. The rule required banks, brokerage firms (e.g., Morgan Stanley, Merrill Lynch, Wells Fargo, Raymond James, LPL Financial, Edward Jones and many others) as well as insurance companies to act as fiduciaries with investment recommendations for retirement accounts, primarily aimed at IRA rollovers.
Unfortunately, even if this rule were in force today, it still would not include non-retirement or taxable accounts. So, the bottom line is, you can’t just assume your financial adviser is bound to act in your best interests.
2. You may be able to negotiate how much you’re charged in fees
Although not all advisers make their living by charging a fee for assets under management, it’s a common method. Such fees typically can range from 1% to 2% of your portfolio per year. That may not sound like a lot, but if you have $500,000 in your portfolio, you could be paying $5,000 to $10,000 every year.
Financial advisers can typically discount fees at least 33% or more from their firm’s fee schedule, but they will only offer this to some clients and not to others. Discounts typically apply to clients with several millions of dollars of assets under management (leverage). Those with under $1 million are charged a much higher fee.
What should consumers do? I recommend price/rate shopping – just like most of us already do with car insurance rates – to find out where they are and where they can be. After researching, I would revisit with the adviser and present the case and the possibility of changing firms if they’re unwilling to negotiate their fees.
3. I may be profiting in ways you don’t know about
Depending on your financial adviser’s firm, the fee discussion can be quite murky. For instance, with an investment adviser, compensation is solely derived on fees or a percentage of assets under management. However, if a financial adviser is also a broker with a Series 6 (opens in new tab) or Series 7 (opens in new tab) license, there are commissions, 12b-1 fees and revenue sharing agreements that could generate bonuses for a firm, based on how much volume was sold. This compensation can come through mutual funds, stocks, bonds and other types of investments.
All advisers are required to disclose these fees, revenue sharing agreements and commissions, but this conversation is usually skimmed over and not discussed in detail as it should. For most brokerage firms or banks, they have a “brochure,” but I doubt many clients even read it over. Also, the same revenue sharing agreement is online. (Google a brokerage firm, such as Morgan Stanley, Merrill Lynch, Wells Fargo, Raymond James, LPL Financial, Edward Jones or any other and add the words “Revenue Sharing” and it will show up.)
If your adviser is not disclosing these conflicts, there’s a chance mismanagement — or even fraud — can occur (learn more about the standards different types of financial advisers are held to by reading “5 Ways Financial Advisers Misrepresent Themselves”).
How can you protect yourself? See No. 7 below!
4. Using client testimonials to persuade you to become a client is against the law
According to Rule 206(4)-1(a)(1) in Section 206(4) (opens in new tab) of the Investment Advisers Act of 1940, any client testimonial constitutes a fraudulent, deceptive or manipulative act. For a financial adviser, this can include bringing their existing clients to meet with a prospective client, as well as social media posts that are meant to deceive or create a false sense of expertise.
In fact, social media has been the target of many deceptive financial advisers seeking professional athletes as clients. They might even make it obvious or purposely post pictures with supposed “clients” who haven’t even received a signing bonus or paycheck yet. For many years, I’ve observed this type of unethical behavior — especially with rookie athletes with a lack of financial education — and when I look at the adviser’s backgrounds there are typically complaints.
If you run across an adviser who uses this tactic, it’s best to steer clear.
5. When I switch firms, it may be a great deal for me, but not for you
Financial advisers are often heavily recruited to move to a rival investment firm with bonuses, higher payouts and even split revenue. In some instances, bonuses can account for several millions in total compensation. For example, a financial adviser moving from one brokerage firm to another can receive as much as four times (or 400%) of their annual compensation.
While this may be a great deal for your financial adviser, it will come at the cost of increased fees and commissions to you. FINRA’s “5 Questions to Ask When Your Broker Changes Firms (opens in new tab)” is a post everyone should read before signing any account transfer forms.
While your financial adviser will probably portray the move as a better opportunity to serve you, it may be the complete opposite. Ask your financial adviser to document the differences and have them sign an acknowledgement. Keep in mind that while everything may seem the same at first glance, there’s always more of an incentive for the financial adviser than there is for you.
6. I may have a checkered past
While many ethical financial advisers exist, there are several who have a dishonest past of customer disputes and other disclosures on their Form ADV (opens in new tab). There are even cases where advisers are partners, with one having a clean background while the other is a total opposite. In one scenario, I witnessed a financial adviser with no complaints but the partner had multiple.
For disclosures, such as customer disputes and investigations, you’d expect a certain level of transparency from your financial adviser, but often it is not the case. Yes, advisers are required to give clients their Form ADV, but clients should definitely ask directly and also conduct their own research.
7. All advisers should sign a fiduciary pledge … but many won’t
While a financial adviser may claim to be working in your best interest — or operating as a “fiduciary” — consumers should make sure to get this fact documented and signed as it will significantly help with any potential complaints or lawsuits. Throughout the years, I’ve noticed many financial advisers are not willing to sign a pledge or flat out refuse, claiming it is due to their firm’s policy.
As always, while there are a lot of exceptional financial advisers, others will say one thing and do another. If you have a financial adviser who isn’t willing to sign a fiduciary pledge, then you’ll have to decide whether it’s worth the potential aggravation.
Remember, when someone cannot reciprocate your loyalty, it might be time to reconsider or even change to someone who is both legally and ethically obligated to put your best interests first at all times.
Here’s the verbiage of what a fiduciary pledge should look like and include:
I, the undersigned, __________________________________, (“Financial Adviser”), pledge toalways put the best interests of __________________________________ (“Client or Clients”) first, no matter what.
As such, I will disclose in writing the following material facts and any conflicts of interest (actual and/or perceived) that may arise in our business relationship:
- All commissions, fees, loads and expenses, in advance that client will pay as a result of my advice and recommendations;
- All commissions I receive as a result of my advice and recommendations;
- The maximum fee discount allowed by my firm and the largest fee discount I give to other customers;
- The fee discount client is receiving;
- Any recruitment bonuses and other recruitment compensation I have or will receive from my firm;
- Fees I paid to others for the referral of client to me;
- Fees I have or will receive for referring client to any third parties; and
- Any other financial conflicts of interest that could reasonably compromise the impartiality of my advice and recommendations.
Financial Adviser: _____________________________ Date: ____________________
Client: ______________________________________ Date: ____________________
Client: ______________________________________ Date: ____________________
Carlos Dias Jr. is a financial adviser, public speaker and president of Dias Wealth LLC (opens in new tab), in the Orlando, Florida, area, offering strategic financial planning services to business owners, executives, retirees and professional athletes. Carlos is a nationally syndicated columnist for Kiplinger and has contributed, been featured or quoted in over 100 publications, including Forbes, MarketWatch, Bloomberg, CNBC, The Wall Street Journal, U.S. News & World Report, USA Today and several others. He's also been interviewed on various radio and television stations. Carlos is trilingual, fluent in both Portuguese and Spanish.
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