Dear "Financial Consultant": Do You REALLY Act in My "Best Interests"?

Dear (Financial Consultant Name):

I have truly appreciated our relationship over these past years. I don't know how you did it, but you earned my trust quickly. And, while I don't understand much about "the market" or what you do, it appears you are doing well for me.

I remember that shortly after I first me you, I signed what seemed to be dozens of forms when I opened accounts with you. However, I don't recall much of what I signed. When I questioned you about it recently, you told me not to worry - that you were legally obligated to act in my "best interests." In fact, you said that FINRA, your regulator, requires that you do so.

Still, I must confess, I don't understand what you do, or how you get paid. I've never received a bill from you, for everything you've done for me. I appreciate that, but it also got me to wondering.

I recently came across this set of questions, from Professor Ron Rhoades, who writes a lot about financial advisors and trust. In fact, I think he uses the word "fiduciary" a lot, though I don't understand what that means, etiher.

But what Prof. Rhoades does suggest is that I, as your client, and at a minimum, fully understand any conflicts of interest you possess, whether you properly manage those conflicts in my best interests, how you get paid, and all of the fees and costs associated with the investments I possess. Hence, I thought I would ask you the following series of questions, as he suggests.

Can you answer these questions for me? Also, can you put your answers in writing? (Prof. Rhoades strongly suggest that I get all of your answers in written form, so that I can contemplate your answers and, if advisable, seek a second opinion.)

Here's the "short list" - as he calls it, designed to test whether you deserve the trust I place in you:

(1) Do you possess the legal obligation to act in my "best interests"? 

        a. Is this the "acting in the client's best interests" requirement you adhere to arising out of a fiduciary-client relationship? I feel I am in a relationship of trust and confidence with you. Prof. Rhoades advises that, if this is the case, I should ensure that you possess broad fiduciary duties of due care, loyalty, and utmost good faith toward me. Do you? If your written answer to both of these questions is "yes" - please proceed to questions 2, 3 and 4.

         b. Or, is this only FINRA's "best interests" standard? Prof. Rhoades advises that under FINRA's "best interests" standard, your duties to me are very low - and that the extremely low standard of "suitability" applies. If your answer to this question is in the affirmative, please go no further in providing answers to me. Prof. Rhoades advises me to obtain a second opinion about my investment portfolio, from an expert, objective, independent fiduciary investment adviser - preferably a "fee-only" advisor. [For more about the failure of the "suitability" standard and how FINRA's "best interests" standard - including one now proposed - does not REALLY protect me fully, please review this prior blog posting by Professor Rhoades.]

(2) With respect to each conflict of interest you may possess, in our relationship, arising from your activities or the activities of your firm, please explain to me how you have, in the past, ensured that you have observed the following procedures to properly manage each conflict of interest in order to ensure that no harm comes to me:

           (A) Did you previously disclose the conflict of interest to me? Specifically, so that I can discern whether I remember your disclosures to me, please explain to me all material facts regarding the conflict of interest. Also, please discuss in your answer what potential ramifications this conflict of interest may pose for me, if it is not properly managed.

           (B) What steps have you taken to ensure that I fully understand the conflict of interest you possess, and its ramifications? (Prof. Rhoades states that you possess the burden to ensure that I understand any conflicts of interest you may possess. Prof. Rhoades also states that my complete understanding of each and every conflict of interest you possess, including the ramifications of each conflict of interest, is a prerequisite to my providing "informed consent" as set forth below.)

           (C) Please indicate where and when I provided "informed consent" to the conflict of interest. Did you record my "informed consent" - which I understand may be verbal or in writing (as to most conflicts of interest).

(3) With respect to each conflict of interest you may possess, in our relationship, arising from you activities or those of your firm, is each transaction you recommended that I undertake (as to those transactions which might be affected by such conflict of interest) also "substantively fair" to me, as is required under a true fiduciary "best interests" standard?

(4) As a further test of your ability to properly manage any conflicts of interest you may possess, please provide your answers to the following questions, in detail:

      (A) What are the total fees and costs associated with each investment product I have purchased as a result of your recommendations. Please list the total fees and costs associated with the first year (such as sales commissions), along with any ongoing fees (in the first and subsequent years). Please express, for each product, the total fees and costs as both a percentage of the amount invested, and as a dollar amount, for the first year of the investment and each calendar year since then. If you are estimating any of these fees and costs, please let me know. And, if certain fees and costs cannot be quantified, please explain why.

     (B) Please set forth the compensation received by your firm as a result of any recommendation from you which I have implemented. Please specifically indicate, for each investment product:
              1. Any front-end sales load or commission paid
              2. Any contingent deferred sales charge or redemption fee that I may have incurred
              3. Whether any contingent deferred sales charges or redemption fees may still be incurred by me, if I decide to sell any investment you have recommend to me.
              4. The amount of ongoing, annual compensation your firm receives from the product provider, such as:
                    a. 12b-1 fees
                    b. Payment for shelf space, or any other revenue-sharing payments
                    c. Brokerage commissions paid to the firm by the investment product provider, as a result of your firm acting as broker for transactions within the product, and whether any of such brokerage commissions were "soft dollar" compensation
                    d. An estimate of any "payments for order flow" your firm may have received
             5. The amount of any investment advisory fees I have paid to your firm each year
             6. Any other payments your firm may have received as a result of recommending the investment product to me
             7. Please also state whether any of the compensation your firm received was potentially higher due to sales by your firm of how much investment product was sold, and if so please describe the arrangements in detail.

     (C) Please also set forth whether you received any material compensation as a result of your recommendations to me. 
            1. Please indicate the amount of such compensation, for each year of our relationship.
            2.  Also, please indicate if you possessed any incentives, which would have resulted in higher commissions or other payments or bonuses, gifts, treatment to trips, or any other material compensation, in connection with the investment recommendations you made to me. Please discuss in your answer the particulars of such incentives.

I know this is a long list, and it may take you several days to compile this information. But, Professor Rhoades notes how very important it is to obtain answers to these questions.

Thank you.

P.S. - Prof. Rhoades suggests other questions I may need answers to later, in this other prior blog post. Hence, I may be asking you more questions, later, as I continue my research and seek to ensure that you are truly acting in MY "best interests," and not your own.