Category Archives: Investing

How to Find a Fiduciary Financial Advisor

 

In 2016, the Department of Labor shocked the investment world by starting the process of requiring investment advisors who provide services to retirement plans (like IRAs and 401(k)s) to act in a “fiduciary” capacity. The term fiduciary, as defined by Merriam-Webster’s is “held or founded in trust or confidence”.1 In other words, the DOL submitted a set of rules to require advisors to be legally bound to act in the best interest of their clients. While the implementation of the rules has been stalled by Congress, the idea has thrown the world of investment advisors into a tailspin.

If you are like most, the idea that it is legal in the United States for financial advisors to act in any capacity OTHER than a fiduciary capacity is surprising. Unfortunately, it is true. You, like most, may believe that every advisor is required to place your interests above his or her interests at all times. Unfortunately, they are not. Even worse, the definitions are so convoluted that it is difficult for the average consumer to identify a fiduciary from a non-fiduciary. I hope this post helps.

Not All Advisors Are Created Equal

When it comes to narrowing the field to advisors who truly have your best interest at heart, there are essentially three different types of advisors and advisory firms in the U.S.:

  Investment Advisor Representatives (IAR): IARs are employees of independent, Registered Investment Advisor firms that are regulated by the SEC or state securities commissions. These advisors must always act as fiduciaries and must prove compliance to their regulating bodies. These advisors are generally compensated by a fee paid directly from the client (not commissions or compensation that comes from their affiliated company) and are often known as “Fee-Only” firms. IARs generally offer full pricing transparency and full disclosure of any conflicts of interest. This is easily the smallest segment of the investment advisory profession, accounting for fewer than 20% of the advisors in the U.S.

•  Registered Representatives: Registered “Reps” are employees of brokerage firms and are regulated by FINRA. Registered Reps are held only to a “suitability” standard which simply requires the advisor to determine whether the investment is suitable for the client; not necessarily the best for the client, not necessarily the least expensive and without the disclosure of any conflicts of interest. These advisors are generally compensated by a commission that is charged on the sale of the products they sell. This is the largest segment of the advisory profession.

•  Dually Registered Advisors: Dual registration means that the advisor may be registered with the SEC or the state securities commission as well as with FINRA. This allows the advisor to claim the standard of fiduciary at one moment and then, when the time is right, sell products on a suitability standard and charge a commission without full disclosure. Yes, amazingly, it is legal in the U.S. to call yourself a fiduciary while only serving in that capacity part of the time. It seems that most of the IARs in the U.S., who should be trusted as fiduciaries, are dually registered, making them non-fiduciaries when it is expedient.

How Can I Find a Fiduciary Financial Advisor?

As you can probably already guess, finding a true fiduciary financial advisor can be difficult, especially with the specter of dual registration. It is possible to identify the true fiduciaries by looking at their registration documents with the SEC or state securities commissions but the documents can be hard to understand and you must know exactly what to look for. Alternatively, you can conduct your own investigation by asking a few, very simple questions to eliminate the non-fiduciary advisors:

“How are you and your company compensated?”

•  A flat fee, hourly fee or a fee as a percentage of assets ONLY = fiduciary

•  Commissions or “I am paid by the company, you don’t pay me anything” = non-fiduciary

•  Fees and Commissions, Fee-based, Hybrid fee and Fee Offset = dually registered

“Do you receive ongoing income from any of the products you recommend in the form of 12(b)1 fees or trailing commissions?”

•  Yes = non-fiduciary

•  No = maybe a fiduciary

“Is your firm registered as an Investment Advisor and do you have an ADV Part II disclosure you can provide?”

•  Yes = fiduciary (but may be dually registered)

•  No = non-fiduciary

“Are you willing to sign a Fiduciary Oath?”

•  Yes = fiduciary

•  No = watch your wallet

For a more comprehensive tool to compare advisors, click here to access the National Association of Personal Financial Advisors Financial Advisor Comparison Tool. This is a free checklist and answer key to help you know the right questions to ask.

Feel free to present this questionnaire to Brown Financial Advisory. We have always been an independent, SEC registered, Fee-Only, fiduciary company. And since it is the right thing to do, we plan to keep it that way.

Source: 1https://www.merriam-webster.com/dictionary/fiduciary

What Fly Fishing Taught Me About Investing

If you’ve ever met me, you know that I love to fly fish. It’s one of my biggest passions. Recently, I was with a friend fly fishing from the beach in Ft. Morgan. I had made this trip many times over the summer without much luck. The weather wasn’t great, but we both had a couple of hours free so we decided to go anyway.

Upon arriving at the beach, it didn’t feel like our trip was going to be worth the effort. However, we were already there, so we decided to give our best shot. We both came prepared with a multitude of flies since we weren’t sure what the fish would be biting that day. The first hour of the day was spent walking towards the end of Ft. Morgan and casting in places that looked promising along the way. We managed to reach the point without a single bite.

I fished the point for a short while, trying different flies in hopes that something would be enticed. This trip started to feel like the many trips I had made before. With no luck, we decided to make our way back down the beach.

As I walked back, I continued casting in places I thought the fish might be holing up. (Many were the same places I had already tried.) About half-way back, I stopped to make a few casts in a spot where the water looked deeper. After a few casts and no bites, I decided to make one more cast and if nothing took the bait, we would head home. As I stripped the fly in, THUMP! I had a bite! Little did I know that I had finally found the perfect spot and in the next two hours, we caught over 60 speckled trout. It was an incredible experience. I had not had a day like that in years!

Investing in the market this year has been rough for many. This year’s performance has amounted to about as much as my many trips this summer before I finally caught fish. It has been tough for the investor who faithfully contributes to his portfolio only to see very little impact to the bottom line.

Markets like we have experienced this summer seem like the perfect time to pack up and go home. Much like my fly fishing trip, the conditions do not look promising. However, like that trip, there are great opportunities that may be in store. Some of the top-performing days often occur during these times of uncertainty, which reinforces the need to stay fully invested despite the volatility. BlackRock recently published the chart below which shows the negative impact of missing the top-performing days over the last 20 years.

Don't Miss Days in the Market

From the chart, you can see that missing just 5 of the top-performing days could have cost you $196,137. When the portfolio misses the best 10 days over the 20 year period, the return is reduced by 50%! Since no one can accurately predict when the market will rise or fall, it is critical to stay invested throughout the volatility. I had no way of knowing which day I would catch fish, but I continued to go fishing knowing that over time the likelihood of me catching fish improves. It is impossible to know which day the market might soar, that’s why it is so important to maintain a long-term perspective. The longer you are in the market, the greater your chances of realizing positive returns.

So what do you do in times like these when you’re feeling the pressure to pack up and head home? You continue to work a strategy that has proven successful. On all of my fishing trips, I bring multiple flies because on some days one fly works well and others do not. I cast my line in places that I know are conducive to catching fish, and I am persistent in making the trips—even when the conditions don’t look so great. The same is true for your portfolio. You should continue to invest, even though the conditions look poor; you should keep your portfolio diversified because it is hard to know what is going to perform well next; and you should remain disciplined and dedicated to your goals.

It’s like my grandfather always said, “There’s a reason they call it ‘fishing’ and not ‘catching’… you don’t always win.” On any given day, the same is true about investing. But with time and discipline, you are almost sure to find your perfect spot.

1http://www.blackrock.com/investing/financial-professionals/advisor-center/conversation-starters/strategies-for-volatile-markets

 

Three Questions To Ask When Searching For A Financial Planner

When it comes to filtering through financial planners to find the right one for you, there are some critical questions to ask the firm and yourself throughout the process.

What kind of clients does the firm specialize in?

It is a good idea to search for a planner that serves a demographic that is largely similar to you. Although you should avoid firms that feel like experts instead of teachers, your firm should be familiar with the concerns and scenarios common to your demographic while custom tailoring his advice to suit your life.

What services do they provide?

In asking this question, you are able to find out what the firm will not do for you. Some firms seek to simply be investment advisors, while others offer a far more comprehensive approach (retirement, insurance, estate, tax planning, etc.). The investment advice you receive may be good, but if other factors of your finances are ignored it may not be best for your unique situation.

How personal is my experience with the representative?

This measurement can often tell you if you are interacting with a salesman, expert, or teacher. It is important for the experience to feel like a conversation, not a lecture or a sales pitch. If you find yourself listening 90% of the time, you are not being counseled, advised, and informed, you are being told.

What makes this firm unique?

Be sure to schedule an interview with the prospective planner to find out what the true aim of their firm is for your money. Some firms will be better at maximizing your investments, while others will focus on protecting your hard-earned money in a wise way. If something doesn’t feel right, keep looking.

Learn more about Brown Financial Advisory

A Fee-Only registered investment advisor, Brown Financial Advisory, was founded in 1986 and is located in Fairhope, Alabama. Learn more about our distinctives, and services, or get started on your journey to live with more purpose.