May 08, 2022

It is important to trust your financial advisor. But is your financial advisor worthy of your trust? How do you know? Do they put your interests first or their own? Your advisor is in business so they have to make money but you have a right to know how much they are making and what conflicts of interest your advisor has with you.

Most people hire a financial advisor like they hire a mechanic or a plumber. You know someone that is an advisor or you have a friend or relative that recommends someone. But hiring an advisor is a lot more important than hiring a plumber. A good and reasonably priced financial advisor can make you hundreds of thousands of dollars over your lifetime. A bad or expensive one can cost you much more. Statistics show that once you pick an advisor whether they are good, bad or mediocre you probably won’t ever leave that advisor.

Sometime before June 30 everyone who has a financial advisor is going to receive a two-page Customer Relationship Summary (Form CRS) from their advisor. This document is going to spell out in writing the services provided to you, how fees are charged, and the conflicts of interest your financial advisor has with you. I suspect 90% of investors won’t even read it. For the rest of you the smart investors, you may need some help to understand Form CRS so here are a few things to look for.  

Read the Form CRS carefully, your advisor is probably both a registered investment advisor representative (a fiduciary) and a broker/ life insurance salesperson. This means they can manage money for you for a fee and/or sell you mutual funds and annuities for a commission. It’s up to you to determine which hat they are wearing each time you talk to them.  

Fiduciary is one legal term you need to know. It means that your advisor legally has to put your interest first ahead of their own. But just because your advisor is a fiduciary does not mean that they are not charging you too much or putting you in investments that pay them additional money. All they have to do is disclose their conflicts of interest in the Form CRS which they know most investors are not going to read. There may also be advisors that use the fiduciary title for one side of their business but then will sell you a high commission annuity from the other side when they get the chance.

Form CRS will tell you how fees are charged but not how much you are paying. It’s up to you to ask. Fiduciaries usually charge an asset-based fee of 1% or more. That means if you invest $500,000 your fee will be $5,000 per year. But there is also an additional cost for the investments like mutual funds where they place your money. That could be another one half of one percent for a total of $7,500 a year. That is a lot more than you should be paying. You won’t see these fees unless you really look because they are taken directly from your accounts before you get your statement. In my experience it’s not unusual for investors to pay 2% or more per year for a managed money account.

Form CRS will also list the conflicts of interest your advisor has with you. Obviously if you are buying products on commission there are a lot of conflicts. If your advisor is a fiduciary and they make extra money in addition to charging you a fee that is a big red flag. If they are using their own company’s products, collecting revenue sharing or getting kickbacks, rewards or trips and vacations for managing your money you might want to consider looking elsewhere for advice.