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Tony Robbins: 7 questions you must ask to keep a financial adviser honest

This is the first of a series of articles from life- and business strategist Tony Robbins on sharpening your investing and personal-finance skills. Published: Oct 11, 2017 10:35 a.m. ET

Doctors, lawyers, and certified public accountants in the United States are legally required to act in the best interests of the people they serve. Yet financial advisers get a free pass. There are more than 200 different designations for financial advisers, including “financial consultants,” “wealth managers,” “financial advisers,” “investment consultants,” “wealth advisers,” and — in case that doesn’t sound exclusive enough — “private wealth advisers.”

But the reality is, of the roughly 310,000 financial advisers in the U.S., less than 10% are legally obligated to put your interests first at all times on all of your accounts. These are called “registered investment advisers” or RIAs for short. RIAs don’t accept sales commissions. Instead, they typically charge a flat fee or a percentage of your total assets for unbiased financial advice. It’s a cleaner model that removes awkward conflicts of interest and hidden agendas.

As for the other 90%, they’re simply brokers in disguise. Many of them work for enormous Wall Street banks, brokerage houses, and insurance companies — the kind that splash their names on sports arenas.

Why does this matter? Because brokers have a vested interest in hawking expensive products, which might include actively managed mutual funds, whole-life insurance policies, variable annuities, and “wrap” accounts.

Don’t get me wrong, this is not an indictment on the good people that work in the industry. I have lots of friends and clients in the financial industry, so I’m speaking with firsthand knowledge when I tell you that they — and the vast majority of their colleagues — are people of real integrity. They have good hearts and good intentions. The trouble is, they work in a system that’s beyond their control — a system that has tremendously powerful financial incentives to focus on maximizing profits above all else.

This is a system that richly rewards employees who put their employer’s interests first, their own interests second, and their clients’ interests a distant third. Even the best-intentioned financial advisers are often working within the confines of this system. They’re under intense pressure to grow profits, and they’re rewarded for doing so. If you — the client — happen to do well, too, that’s great. But don’t kid yourself. You’re not the priority.

And for folks like you and me, that’s a recipe for disaster — unless we take the precaution of learning how the system works against us, and how to counter it. How do you start? By making sure to ask these seven questions of a financial adviser, or any adviser, you are considering:

 
1. Are you a registered investment adviser?

If the answer is no, this adviser is a broker. Smile sweetly and say good-bye. If the answer is yes, he or she is required by law to be a fiduciary. But you still need to figure out if this fiduciary is wearing one hat or two. That’s because Its not enough that your financial adviser is an independent RIA. You need to be careful that the RIA is not also a broker.

You heard that right. In a strangely allowable arrangement, an RIA can be both a broker and a fiduciary in a process called “dual registration.” When someone is “dually registered,” at one moment they play the part of an unbiased adviser, reassuring you that they abide by the fiduciary standard and can provide you with conflict-free advice for a fee. But they can switch hats and act as a broker, earning commissions or kickbacks by selling you specific products. When they’re playing this broker role, they no longer have to abide by the fiduciary standard. In other words, they’re sometimes obliged to serve your best interests and sometimes not. How warped is that? These arrangements are perhaps the most dangerous for consumers as it creates immense confusion.

2. Are you or your firm affiliated with a broker-dealer?

If the answer is yes, you’re dealing with someone who can act as a broker and usually has an incentive to steer you to specific investments. One easy way to figure this out is to glance at the bottom of the adviser’s website or business card and see if there’s a sentence like this: “Securities offered through [adviser’s company name], member FINRA and SIPC.” This refers to the Financial Industry Regulatory Authority and the Securities Investor Protection Corporation, respectively. If you see these words, it means he or she can act as a broker. If so, run. Run for your life!

3. Does your firm offer proprietary mutual funds or separately managed accounts?

You want the answer to be an emphatic “no.” If the answer is yes, then watch your wallet. It probably means they’re looking to generate additional revenues by steering you into these products that are highly profitable for them (but probably not for you).

4. Do you or your firm receive any third-party compensation for recommending particular investments?

This is the ultimate question you want answered. Why? Because you need to know that your adviser has no incentive to recommend products that will shower him or her with commissions, kickbacks, consulting fees, trips, or other goodies.

5. What’s your philosophy when it comes to investing?

This will help you to understand whether or not the adviser believes that he or she can beat the market by picking individual stocks or actively managed funds.

6. What financial planning services do you offer beyond investment strategy and portfolio management?

Investment help may be all you need, depending on your stage of life. But as you grow older and/or you become more wealthy with various holdings to manage, things often become more complex financially. For example, you may need to deal with saving for a child’s college education, retirement planning, handling your vested stock options, or estate planning. Most advisers have limited capabilities once they venture beyond investing. In fact, most aren’t legally allowed to offer tax advice due to their broker status. Ideally you want an adviser who can bring tools for tax efficiency in all aspects of your planning — from investment planning to business planning to estate planning.

7. Where will my money be held?

A fiduciary adviser should always use a third-party custodian to hold your funds. For example, Fidelity, Schwab, and TD Ameritrade all have custodial arms that will keep your money in a secure environment. You then sign a limited power of attorney that gives the adviser the right to manage the money but never to make withdrawals. The good news about this arrangement is that if you ever want to fire your adviser, you don’t have to move your accounts. You can simply hire a new adviser who can take over managing your accounts without missing a beat. This custodial system also protects you from the danger of getting fleeced by a con man like Bernie Madoff.

Tony Robbins is a life- and business strategist and author. His books include Money: Master the Game and Unshakeable: Your Financial Freedom Playbook (Simon & Schuster). This article is adapted from Robbins’s monthly “Power Report,”which provides advice and tips about money, investing, and personal finance.

The Five Star Wealth Manager award, administered by Crescendo Business Services, LLC (dba Five Star Professional), is based on 10 objective criteria. Eligibility criteria – required: 1. Credentialed as a registered investment adviser or a registered investment adviser representative; 2. Actively licensed as a registered investment adviser or as a principal of a registered investment adviser firm for a minimum of 5 years; 3. Favorable regulatory and complaint history review (As defined by Five Star Professional, the wealth manager has not; A. Been subject to a regulatory action that resulted in a license being suspended or revoked, or payment of a fine; B. Had more than a total of three settled or pending complaints filed against them and/or a total of five settled, pending, dismissed or denied complaints with any regulatory authority or Five Star Professional’s consumer complaint process. Unfavorable feedback may have been discovered through a check of complaints registered with a regulatory authority or complaints registered through Five Star Professional’s consumer complaint process; feedback may not be representative of any one client’s experience; C. Individually contributed to a financial settlement of a customer complaint; D. Filed for personal bankruptcy within the past 11 years; E. Been terminated from a financial services firm within the past 11 years; F. Been convicted of a felony); 4. Fulfilled their firm review based on internal standards; 5. Accepting new clients. Evaluation criteria – considered: 6. One-year client retention rate; 7. Five-year client retention rate; 8. Non-institutional discretionary and/or non-discretionary client assets administered; 9. Number of client households served; 10. Education and professional designations. Wealth managers do not pay a fee to be considered or placed on the final list of Five Star Wealth Managers. Award does not evaluate quality of services provided to clients. Once awarded, wealth managers may purchase additional profile ad space or promotional products. The Five Star award is not indicative of the wealth manager’s future performance. Wealth managers may or may not use discretion in their practice and therefore may not manage their client’s assets. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or this publication. Working with a Five Star Wealth Manager or any wealth manager is no guarantee as to future investment success, nor is there any guarantee that the selected wealth managers will be awarded this accomplishment by Five Star Professional in the future. For more information on the Five Star award and the research/selection methodology, go to fivestarprofessional.com. 1,102 Austin area wealth managers were considered for the award; 161 (15 percent of candidates) were named 2018 Five Star Wealth Managers. 2017: 1,431 considered, 207 winners; 2016: 1,283 considered, 351 winners; 2015: 1,968 considered, 374 winners; 2014: 2794 considered, 357 winners; 2013: 2,254 considered, 399 winners; 2012: 1,673 considered, 392 winners.