3 Coffee Talk Items With Your Investment Advisor

Let’s face it; investment management isn’t a business that many think of dearly when discussed. It’s evident when you open the newspaper that there are some advisors out there who are making some very poor decisions and being locked away for doing so. But, of course, there are others who are doing it the “right way”. The key word when it comes to wealth management here is Transparency. How much are you paying your advisor? How are they making their investment decisions on your behalf and do they have access to a full range of investment solutions?
Below are some key topics that should always be at an investors fingertips when needed:

1. Is your advisor a “broker” or a Registered Investment Advisor?
This may seem like the same thing but it can be quite different. When seeking out an advisor or wealth manager make sure to know if they are any obligation to suggest investment vehicles that are in your best interest. A “broker” generally is not bound to this obligation and is not required to compare the costs of different options nor the fact that what they are selling may be “proprietary” products (ex. a Morgan Stanley investment consultant placing a Morgan Stanley mutual fund into your account).
An RIA or registered investment advisor on the other hand is actually legally bound to act in this fiduciary duty and to put each client’s interests first. If they are independent, they really have no incentive to push products into your account. Think of the independent coffee shop serving several different brands of coffee in the same light.

To do: Next time you chat with a finance person, ask them if they HAVE to act in a fiduciary duty for you. If they have a blank stare or say they don’t know what that means, then you should walk away.

2. Beware of exorbitant fees
We have all read that the commission model is dead. Do investors even know if their “broker” is making money on the trades they make? Fee-based advisors have gained in popularity in the recent decade and rightfully so. These advisors are being paid for their services and also are aligning themselves with their clients. But, you should always know what they are being paid. For example, I sat with a new client last month and I asked her “what is the annual management fee your previous advisor was charging”. She had no clue. As we looked through her statement we quickly found out it was 1.40%. This is considerably high. If your fee is over 1% (disclosure: Sustainvest charges a maximum fee of .75% or 75bps) then you should ask your advisor why. To put this into real numbers, someone with $500,000 to invest would save about $2,500 per year just by working with an advisor that charges .75% instead of 1.25%. That $2,500 could be used for a nice vacation instead of going into the advisors pocket. They should also place their fee structure on the website and not just on page 23 of their management contract.

To do: Simply call your advisor and ask them what their fee is. It should be a quick reply and not some drawn out discussion.

3. Your advisor should be easy to talk with and help answer questions on a range of money –related topics.
Your advisor should know your goals, values and of course your risk tolerance. In the world of impact investing or sustainable and responsible investing, they should have an idea of what a client would really NOT like to see in their account (for example, if a client just detests big pharmaceutical due to animal cruelty issues or big oil companies then this should be known). On top of this retirement planning, budgeting and estate planning could be topics of interest that should be a phone call away to answer any questions. They may not have all of the answers then and there, but the advisor should be able to move clients in the right direction and NOT be paid for doing this. Again, remember, independent advisors have access to independent consultants. When these services start to get referred “in-house” you have to wonder if there are solid checks and balances to warrant fees and processes.

To do: Ask your advisor if they use proprietary funds or if they are independent.

In conclusion, the financial advisory sector is highly regulated. There are the bad eggs out there who are non-transparent and charge high fees but then there are also the good advisors who are realistic with their clients and are helping them manage their risk tolerance with their goals to arrive at their destination. Knowing these 3 key points should help get investors to land without too much turbulence.

About Dale Wannen