Is Your Financial Adviser Truly Independent?

(Image credit: James Brey)

If you were buying a home, you probably wouldn’t want a Realtor who showed you only the houses listed by his company. Pretty soon you’d find yourself asking, “What about this place with the pool? Or this one with the walk-in closet? That’s what I really want.” And if he couldn’t accommodate you, you’d quickly find someone who could.

When is a 'Fiduciary' Truly Acting as a Fiduciary?

It wouldn’t matter if he was nice. Or if he worked for a well-known real estate firm. You’d want him to find homes that fit your needs and price range, and to give you as many options as possible.

I often wonder why people aren’t as demanding about their investment choices.

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Are You Working with a ‘Captive’ Adviser?

I understand that folks feel secure when they go with brand-name broker-dealers — the ones that have quality TV commercials, tall buildings downtown, perhaps even their name on a stadium. And I’m sure some investors just feel more at home at their local bank, or they like the convenience of using the financial services offered there.

It’s possible most aren’t even aware the person they’re working with at the bank or the big brokerage company is what’s known as a “captive” adviser — a financial professional who is a registered representative of the firm for which he works, and who typically can recommend only the products offered by that firm or those that they allow on their platform. Which means the things he suggests will be suitable for his clients’ needs, but not necessarily the best possible options, because he simply might not have access to the best solution.

He might tell you what he’s selling is superior — but, of course, he’s a bit biased. The licensing a captive adviser works under doesn’t require the more stringent fiduciary standard, which says the adviser must act solely in the client’s best interests. A captive adviser may have good intentions — but he also has limitations. If he can’t give you what you want, he’ll give you what he has. After all, he still has to make a living.

A Better Way to Go

Which is why a major shift is going on in the industry toward truly independent advisory practices.

Independent advisers offer investment products from a number of companies. They don’t get a bonus or a corner office based on revenue-sharing quotas. And they don’t limit their recommendations or suggest strategies based on a list of products built by their bosses; they look at everything available to determine the best fit for the client. That’s where their loyalty lies.

I know it can be difficult to tell the difference between these types of firms and their advisers. It always has been — and the jumble of letters we put behind our names (CFP, CFA, CFS, etc.) doesn’t mean much to anyone outside the industry. It also doesn’t tell you whether you’re working with an independent adviser, who has your best interests in mind.

Fiduciary Rule Basics for Investors

The push for better disclosure statements and to make the fiduciary obligation to clients an industry standard has, unfortunately, muddied the waters even more. Firms that use the word “independent” in their name or on their marketing materials are not always completely self-contained. In many instances, they are “independent” practices of another firm. Think of it like owning a McDonald’s franchise: You still have to sell burgers even if your customers want sushi; however, you are an “independent” franchise.

Of course, the most important thing is to find an adviser you trust. Some important factors to keep in mind:

Do you feel confident that he is looking out for your best interests?
Does he have a passion for the work?
Is he persistent?
Do you get along?
Does he answer the phone and your emails?

The Question You Always Want to Ask: Why

But your adviser also should be capable of explaining why he picked a particular fund or strategy and whether there was a commission involved or some other motivation for the choice.

Open your statements and look past the bottom line. Read the fine print on disclosures. Ask what licenses your adviser holds and whether he and/or the firm is an independent Registered Investment Adviser, registered with the either the Securities or Exchange Commission (SEC) or state securities authorities.

Finding the right products and strategies to build your nest egg is obviously crucial to your financial success. But hiring the right person to help you make those decisions — with the most choices and the fewest conflicts — is every bit as important.

Kim Franke-Folstad contributed to this article.

Financial Advisers: Don’t Follow the Rules, Follow the Principle

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Casey B. Weade is president of Howard Bailey Financial Inc. in Indiana and author of the book "The Purpose-Based Retirement." Weade, a financial professional, hosts The Purpose-Based Retirement radio and TV shows in the Fort Wayne area. He earned the prestigious Certified Financial Planner™ (CFP®) certification in addition to being a Retirement Income Certified Professional® (RICP®). He is also an Investment Adviser Representative (IAR), as well as life, accident and health insurance licensed and Long-Term Care Certified.