How to Choose an Advisor Who Won't Put Your Interests First

By Charles L. Stanley CFP ChFC AIF

As a take off on the old adage of, Which came first the chicken or the egg? I want to ask a slightly different question, Which comes first the investor or the advisor?

What seems to be a discussion limited to the insiders of the financial services community shouldnt be. Within the realm of personal financial advice, there is heated discussion going on about fiduciary standards versus a suitability standard and who is a fiduciary and who is not, or a Who wears the white hat? and Who wears the black hat? kind of discussion.

Part of the discussion revolves around compensation. Is it better to work with a Fee-Only Advisor, one who accepts no form of compensation except that paid directly by his client. That means no referral fees, commissions, kick backs or other forms of compensation. There is a significant difference between Fee-Only and Fee-Based Advisors, but most consumers and even many financial journalists dont seem to recognize that they are different; something that Fee-Based Advisors are happy about. What difference does compensation make? Cant an Advisor be competent and do a good job regardless of whether he is paid a commission or a fee? Of course. So, what really are we talking about?

I think we are really talking about the culture in which services are delivered; and that is really important to you, the consumer. There are essentially two cultures for financial advice:

1. A culture in which the interests of the client are taken into account before the revenue stream interests of the Advisory firm; or,

2. A culture in which the advice must benefit the revenue stream of the employer first, and only secondarily benefit the you, the consumer.

The first is a fiduciary culture; the second is a sales culture. The first will be held to a fiduciary standard, the second is only subject to a suitability standard. The first is the culture of the Registered Investment Advisor, the second is the culture of the Registered Representative (aka a stock broker).

The really difficult area comes in with hybrid or Fee-Based firms where sometimes they are providing advice for a fee and other times with the same client they are acting in the role of a Registered Representative who sells investment products for a commission. When they are providing advice for a fee, they are under the requirement to act in a fiduciary capacity and are held under the law to a fiduciary standard like a CPA or an Attorney. However, when they switch hats to providing product as a Registered Representative, they are now operating under a suitability standard as a salesman and have a fiduciary duty to their employer, the Broker/Dealer by whom they are employed. And, when they switch hats, they have an obligation to inform you that they are no longer acting under a fiduciary standard, but I bet they won't.

If you think this is confusing for you as a consumer, let me tell you it is also confusing for an Advisor who wants to keep this straight. I know, I did it for years. Finally, I couldnt take the confusion any longer and left the Broker/Dealer world so I could always work under a clear fiduciary relationship where I can put the interests of my clients first - always.

The powerful marketing forces of the major Wall Street firms dont want the public to really understand this. I may get into trouble for writing this, but for years Wall Street firms have operated with the regulators allowing a certain amount of deception to exist. There have been many television ads for major firms that talk about providing advice to clients and putting your needs first, blah, blah, blah. Then, at the end of the ad, in print too small to read, an announcer that speaks so fast no one can understand him reads the disclosure; they disclose that they are really brokers and not advisors. This sham disclosure is designed to give them cover for future arbitration cases. Does this manifest the culture you want to work with? Does it sound like your interests are really going to come first for this firm?

So, how does an ordinary citizen like you sniff out what is really going on here? Well, it is really fairly easy. Just ask one right question and it will give you the answer. Ask your potential Advisor (or if you work with someone now, ask them this question), Are you ALWAYS a fiduciary in your business relationship with me? It should get a simple yes or no answer. If you get some kind of hedge for an answer, then you know that this is not a trusted fiduciary relationship " the one in option #1 above. You have a #2 business type relationship. If you have a #2 type relationship, you might want to reconsider it, or at least know you have to keep you eyes open because it is a buyer beware relationship, not one where you can be more relaxed because you know your Advisor has chosen to place him or herself under the legal requirement to always act in your best interest.

If you want to find a trustworthy fiduciary Advisor, there is a single financial planning organization that is made up strictly of Advisors who have embraced fully the #1 type relationship, the fiduciary relationship, where your interests come first; it is the National Association of Personal Financial Advisors, or (NAPFA). Every Registered NAPFA Financial Advisor annually signs a fiduciary oath. These Advisors have taken the conflict of interest created by commission based compensation out of the picture. They are the Fee-Only Advisors (not "Fee-Based") " in my opinion (and I admit I am prejudice, because I am one) they are the guys with the white hats.

Now, you know that there is a difference between those who provide financial products for a commission and those who provide financial advice for a fee.

About the Author:

To further protect yourself from crooks from scoundrels, get a free copy of Charles Stanley's Special Report: How to Protect yourself from crooks from scoundrels from being Maodff'd. Bernie Madoff is the Wall Street broker who allegedly made off (get the pun) with $50 Billion of his client's money. Don't let that happen to you.