What might be a dealbreaker when choosing a financial advisor? A history of being sued for making risky bets against their clients’ wishes, for starters.
But that might not be public knowledge, writes Jason Zweig of the Wall Street Journal’s The Intelligent Investor column.
Zweig recently reported that, to his surprise (and mine), “In some ways, financial advisors have to disclose less than brokers do—and what they don’t tell you can hurt you.”
I couldn’t agree more.
When I launched Lifeguard Wealth in 2012, I created a list of questions that I encouraged new clients to ask me. The Intelligent Investor has inspired me to add a bit to it.
Questions to Protect Yourself
I’ll start with a series of questions focused on making sure your advisor relationship is built on a foundation of accountability and responsibility.
1. Have you ever been sued in your capacity as a financial officer?
You should examine the advisor’s ADV. This is an SEC-mandated annual report and brochure that all advisors must make available to the public, and it includes many required disclosures.
However, as Zweig points out, there are loopholes that allow some advisors to avoid disclosing civil lawsuits. The best you can do is ask and make a record of the advisor’s response.
Don’t accept a response like, “We have had no reportable incidents” as a good enough answer. If the answer is “yes,” ask for details.
- What was the amount?
- How was it resolved?
- Was this the only incident?
2. Are you registered with the SEC or your state securities regulator and with FINRA?
The best answer to these questions should be “yes” to all. In the case of SEC or state registration, I can’t put the reason why any better than investor.gov:
– “Unlicensed, unregistered persons commit much of the investment fraud in the United States, so you should always check to see whether an investment adviser is registered with the SEC or your home state before making a decision to invest with them.”
In addition, FINRA is a not-for-profit organization created to protect investors. It requires its members to register on BrokerCheck (and disclose all civil lawsuits there, just like brokers).
3. Do you work as a fiduciary?
It’s important to understand the distinction in terms. Zweig’s article focuses on how the line between “broker” and “advisor” can be blurred. I’d like to introduce a third key term: “fiduciary.”
You would think that, unlike a broker that simply performs trades, an advisor would dispense advice that’s always in your best interests. This isn’t always true.
However, the word fiduciary is a legal term that carries with it a duty to act in the best interests of the client. It is a higher ethical standard, a higher standard of care. (More on that under #4.)
4. How do you get paid?
Look past low or zero fees for services. It’s important to know whether the advisor could be influenced by a third party to sell you financial products that may not be in your best interests.
If the advisor is “fee-only,” confirm that this truly means no outside compensation. Fiduciary advisors, who must either have no conflicts of interest or disclose them, are often fee-only.
5. Who will have custody of my money?
It’s been more than a decade since Bernie Madoff was arrested for committing the largest Ponzi scheme in history, but it remains an important cautionary tale about misplaced trust.
Madoff got away with this dangerous shell game of robbing new client capital accounts to post as “returns” for others in part because he was the custodian of his clients’ funds.
Find out if your advisor uses a third party to hold your investment funds. This is safer because your advisor cannot access or move funds without your authorization.
6. Do you provide a written contract?
You would never lease a property or vehicle without a written lease agreement, right? That document protects you if the lessor violates the agreement in any way.
For the same reason, everything related to disclosure responsibilities, fiduciary duties, fees, and custody of investment funds should be written down and spelled out in plain language.
Questions to Meet Your Needs
Once you’ve addressed concerns about accountability and responsible wealth management, you can then assess whether the advisor is a good fit for you.
7. How long have you been an advisor?
Experience is always important. It only becomes more so as you accumulate wealth and approach retirement.
8. What is your investment philosophy?
Every advisor should have an answer to this question, and the answer will tell you a lot about whether they’re a good fit. (See our philosophy below.)
9. Do you use a written investment plan?
This question is about discipline. Your financial advisor is there to help you stick to the sound investment plan you’ve made together. A written plan tends to discourage heat-of-the-moment course corrections that exceed your agreed-upon risk tolerance.
10. How often do you meet with clients?
Confirm that you’ll have the level of access to your advisor that you want to have. You and your advisor should be on the same page with what your working relationship will look like.
11. What services do you offer in addition to investment management?
Your advisor may be able to help with financial planning, tax mitigation, estate review, philanthropic advising, and more to help you accomplish important life goals.
What About You, Joe? Why Lifeguard Wealth?
Finally, I’ll happily turn these questions on myself.
1. Have you ever been sued in your capacity as a financial officer?
No. I am pleased to say that I have never been sued as a financial officer, nor have my team and I ever received a client complaint.
2. Are you registered with the SEC or your state securities regulator and with FINRA?
Yes, Lifeguard Wealth is registered with California’s Department of Financial Protection & Innovation and FINRA, and you can find me and Lifeguard Wealth on BrokerCheck.
3. Do you work as a fiduciary?
Yes, we are held to the highest ethical standard of care.
4. How do you get paid?
As a fee-only firm, we are paid by our clients alone based on assets under our management. Our fee schedule is fully disclosed here.
5. Who will have custody of my money?
Our third-party custodian is Charles Schwab, one of the most trusted names in financial services.
6. Do you provide a written contract?
Yes, and we diligently hold ourselves accountable to it.
7. How long have you been an advisor?
Though I founded Lifeguard Wealth in 2012, I’ve been doing this for 22 years … and counting!
8. What is your investment philosophy?
To provide superior, evidence-based investment solutions and wealth advice without bias.
9. Do you use a written investment plan?
Yes, all clients have a written investment plan.
10. How often do you meet with clients?
We meet with clients as often as necessary. On average it is three times per year.
11. What services do you offer in addition to investment management?
Explore our website to learn more about life planning, wealth protection, wealth transfer, and our charitable planning services.
Or feel free to reach out and say hello! I look forward to answering whatever questions you may have to make sure you’re protecting yourself.
I wouldn’t advise anything less.
“I trust Joe to advise us on all things financial as he takes his fiduciary responsibility seriously and I implicitly trust him.” – client since 2012
