Just this week, a discussion ensued when a member of the Social Media Marketing for Financial Professions (LinkedIn) asked: What does an ethical financial adviser look like?
I am attempting to answer that question in this introductory post to Chapter 12 titled A Conversation with a Fee-Only Fiduciary Financial Adviser in our book, Late Bloomer Millionaires: A Financial Story and Investment Guide for the Late Starter.
Excerpts from Chapter 12 are below. For the entire chapter click here.
Locating an ethical financial adviser with fiduciary responsibilities is so important for us ordinary investors, we devoted two chapters to this topic alone. Below are excerpts from a hypothetical discussion we created showing what an adviser that truly looks out for the clients best interest would look like. What are the central themes that frame this professional relationship?
A Conversation with a Fee-Only Fiduciary Financial Adviser
Prologue: Let’s eavesdrop on a fictional conversation between a client and a genuine fiduciary fee-only financial adviser. Samantha, a 30 year-old client, needs assistance with her employer sponsored retirement plan. Using objective financial information (not sales pitches), we created the following “conversation.”
SETTING: FINANCIAL ADVISER’S OFFICE.
Excerpt #1, near the end of the complementary first session.
Samantha: (relieved). “Oh, thanks, I was a little nervous because I didn’t think I knew enough. I should know more.”
Adviser: “Of course. I encourage my clients to know as much as they can about investing. I’ll give you a short reading list to get started. It’s your money and only you can take the responsibility for your retirement. My job is to help you learn which investments are available on your employer’s 401(k) plan which will work best for you. This will get clearer as we go along. We’ll work on a plan with some risk to grow and preserves what you have earned. It’s a delicate balancing act to help you prepare for down markets. It is surprising how a little financial self-education on investing help clients sleep through market fluctuations.”
Samantha: “OK, that sounds fair. My fiancé suggested I ask you if you’re… ah, I forget the word, it’s something about looking after my interests…”
Adviser: “Your fiancé is on the ball. He wants to know if I am a fiduciary.”
Samantha: “Yes. Now I remember, do you sign fiduciary agreements with your clients.”
Adviser: “Here it is.”
Samantha: “That was quick. I owe Ben a dinner, thanks.”
Adviser: “First, let me explain this agreement, it is the basis of our professional relationship should you hire me. As your fiduciary, I will not put you in funds which pay me commissions. I work strictly on an hourly basis. Together we pick the funds which meet your best interests. Your investments are not paying me, you are. When you hire a contractor, mechanic or a CPA, they charge a onetime fee. I work the same way. If you want to hire me, my fee is $200 per hour and there are no other fees. But what I want is that you be willing to learn to take responsibility for your plan.”
Samantha: “I like the direction we are going. You removed the inherent complications about your fee as Ben wanted. It’s very straightforward. But I’m not sure how I can take responsibility for my plan.”
Adviser: “That’s why I get paid. It’s training you, in a sense, about becoming empowered to take charge. Honestly, Samantha, I think you can do this. Believe me, $200 per hour is cheaper than paying a percentage of your portfolio. Most important, you’ll feel confident knowing you have an understandable plan. While I will never promise which stock or mutual fund will outperform the market, I can promise you will know how to begin to take responsibility after our next session and in the future. It’s a gradual process. OK?”
Samantha: “I appreciate your incremental approach, the explanation about fees, how you are compensated and the risk of FTC stock. You answered my initial question about diversification. I didn’t know this. As I said, I like where we are going. Alright, let’s go for it.
Excerpt # 2: About the middle of the 2nd Session, a week later.
Samantha: “When I came here I wondered if I would trust you with my money, like, what would you recommend and would the investments be good for me. But that’s not what you have said at all. You are not recommending individual stocks, you’re recommending I invest in all available companies. It’s information I didn’t expect. You have reversed the decisions and put the responsibility right back on me. The most convincing part is your recommendation of the broad asset classes which invest in all companies. Furthermore, you showed me how I can take responsibility and make the decisions. Not necessarily the right or wrong decision to invest in this or that particular investment but to decide to invest in all companies. I believe I understand where we are going and I am getting more comfortable. I get it about moving my money from owning individual FTCs tock to an index reduces risk.
Adviser: “Yes, the point is to stick with a plan you setup and understand. The biggest mistake people make is trusting somebody else 100 percent with their money, paying too much for advice, not knowing enough about diversification and taking on too much risk. People may not admit it but they look for the one or two investments to get to their financial goals quickly.”
Excerpt # 3:
Samantha: “Sounds like you offer more than just a strategy and information, but psychological support too?”
Adviser: “I am not a psychologist. But yes, that’s precisely how I can assist you, after you set up a plan today. I will not leave you alone. Just one step at a time. One of the books I recommend is a book on psychology called “Your Money and Your Mind” by Jason Zweig.”
Excerpt # 4:
Samantha: “I feel good about our conversation. When I first called for an appointment, I had never thought about this. I forgot why I came here because I am learning so much now. I’m smart, but finances, money and investing were those things somebody else understood. But you kept explaining the big picture. When you said only I can take the responsibility, I thought what the heck am I paying you for? But you’re right. I’m still a little foggy on the details but the major idea is investing may not be as complicated and intimidating as I thought it was. Investing in the broad economies did it for me. Thanks.”
Excerpt # 4: Authors’ Debrief
This conversation demonstrates the guidance of the client toward taking personal responsibility for choices rather than simply steering toward pre-selected advisor‘s products (funds or annuities).
1. Fee-only Advisement Cost for Samantha: 2.5 hours is $500 out of pocket.
2. If Samantha’s money was in an actively managed fund paying the adviser commissions (Load): $35,000 x 3% commission + 1.25% annual expense ratio =$1050 + 437.50 = $1487.50. As Samantha increases her portfolio, the annual expenses would go up.
3. Investing may not be as complicated, risky or varied as commissioned salespeople would like you to believe. If they can convince you they are financial shamans, there to relieve you of all losses with riskless fixed accounts, rest assured, they will relieve you of the full market returns you deserve.
4. A genuine fiduciary will never enter into any real or potential conflicts of interest when recommending investments to clients and will never make changes to your plan without your knowledge.
5. Notice, nowhere in this hypothetical conversation did Samantha and the adviser drift into topics which would not help Samantha’s need to understand her plan, the investing process or taking responsibility. For examples, the future of interest rates, China, politics, past, present and future market conditions, gold, real estate, sector funds, futures, options, annuities, the future of the Euro, Greek debt crisis, or—heaven forbid—looking on the computer screen as the adviser scrolls down the hundreds of different mutual funds to decide where to invest based on past 1-3-5 year performance. These extraneous topics are a total waste of Samantha’s valuable time and money. The authors had a brief experience with a broker who scanned mutual funds on his computer. It was miserable looking at the streaming of one mutual fund after another, like a never-ending, slow-moving slot machine. No wonder people are frightened with trusting somebody with their money. We rushed out of his office with the energy of a scared yachtsman bailing out his leaking two-master.
For the Complete Chapter 12, Click Here