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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.

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