The most important thing to know about the person managing your money is HOW HE/SHE IS PAID. Sixty-six percent of Americans do not know how their “guy” is paid (Cerulli Associates). If you don’t, you do not know where his incentives are placed. You don’t know if his financial interests are aligned with yours.
First, you have to know who your “guy” is. Is he/she a broker or an investment adviser? I managed money, both as a broker and an investment adviser and there’s a big difference. Chances are, if you have less than $500,000 of investable assets, your “guy” is a broker and not an investment adviser. An investment adviser, (sometimes called a financial adviser or wealth manager) is registered with the SEC as a Registered Investment Adviser (RIA) . A broker may have an RIA, but chances are he or she does not. Most RIAs have an investable assets minimum for new clients of $500,000, some may take clients with $250,000, but usually not less. Remember, that’s investable assets, not equity in a home.
Brokers are paid on commission. They make their livelihood off of a percentage on each product they sell. To you. The client. Yes, your broker may get you into his or her office by saying they will do a whole financial plan for you for free, or they may ask you to pay for the financial plan, but the way they feed their kids is off commissions. Not financial plans.
He makes his money off selling you HIGH commission products like annuities, life insurance (not term life, but whole life policies), mutual funds, and the like. In some brokerage houses, your guy can ONLY sell his company’s products and they may not be right for you. An investment advisor (with an RIA) will charge you based on your Assets Under Management (AUM). They make their money from having fewer clients with high AUMs and taking a percentage, which is why their minimums are so high ($500k usually).
An RIA has a fiduciary duty (by law) to his or her clients. All actions performed by the fiduciary are for the advantage of the beneficiary (client). A fiduciary, must divulge conflicts of interest, and must put his clients’ needs above his own.
A broker, on the hand, has only an obligation of suitability , which means he merely has to make recommendations that are consistent with the financial interests and current circumstances of the client (e.g. many middle and upper middle class people own mutual funds, so they’re suitable for you, not worrying about whether they are the best thing for you personally). A broker does not have an obligation to expose conflicts of interests (i.e. selling you a product his bank offers, but is more expensive than another similar product). Seventy-five percent of clients believe their broker has a fiduciary responsibility toward his clients and he does not (Consumer Federation of America and AARP).
So what does all this mean? Know how your money person is being paid. If he or she has a fiduciary obligation to you, you can feel more comfortable about his or her recommendations. If he or she is a broker with no fiduciary obligation, you need to ask more questions about the products he or she is putting in your portfolio than you do right now. Whose are they, how much is your broker being paid, why, specifically is this product right for me? What other products could achieve the same results? Just to name a few.