Sunday, January 29, 2017

Investment Consumers: Protect Thyself with This Questionnaire; Find Your B.F.F.

The U.S. Department of Labor’s Conflict of Interest (“Fiduciary”) Rule is likely to be delayed – and then eventually killed – by the Trump Administration. This poses major problems for consumers.

I offer a solution. An easy-to-administer questionnaire, designed to assist consumers to find a "Bona Fide Fiduciary."


Many firms and advisors profess to work in your “best interests” or as “fiduciaries” – but after forming a relationship of trust they then engage in self-serving (and detrimental to the consumer) behaviors, such as:

  • First, they may recommend investments that pay them more compensation, by selling more expensive investments. Let’s make this clear – the higher the fees and costs of your investments, the lower your returns will be.
    • For example, if you are investing in “U.S. large company mutual funds” – you will be better off choosing an S&P 500 Index® fund that has lower expenses, than the same fund that has higher expenses.
    • Some mutual funds and ETFs are more expensive, if they invest in certain asset classes. For example, generally speaking foreign stock funds are more expensive than U.S. stock funds. It’s o.k. to invest in a more expensive asset class – provided it is not extraordinarily expensive.
  • Second, many investment salespeople use titles that imply that they are not selling to you, but rather advising you (as a fiduciary). The U.S. Securities and Exchange Commission permits this (a serious error on their part).
    • For example, many investment salespeople use titles such as “Financial Advisor” or “Financial Planner” or “Wealth Manager” – titles that imply that a relationship of trust and confidence exists, but much of the time such a relationship does not exist.
  • Third, few investment advisers adhere to the dictates of the prudent investor rule, when designing and managing an investment portfolio for you. Instead, they speculate with your hard-earned funds. Or, worse yet, they have only been trained to sell products, with little training in actually selecting investment strategies or investment products.
  • Fourth, even advisers who tout their status as a fiduciary often turn around and then disclaim their fiduciary liabilities. Or seek to have their customers waive away the fiduciary duties they would otherwise possess. These disclaimers and waivers are well-hidden in the dozens of pages of paper documents consumers receive when they open accounts.
The result is tremendous harm, plain an simple. Expensive, inappropriate investments that nearly always underperform over the long term. Huge and unnecessary taxes on investment returns. In short - a devastating blow to the financial goals, and dreams, of the consumer.

Hence, it is more important than ever for consumers to locate, and work with, bona fide fiduciaries. Yet, it is increasingly tough to discern “the bona fide fiduciaries” (BFFs, I call them) from the pretenders.


Here is a questionnaire I suggest EVERY consumer utilize, when evaluating their choice of financial and/or investment advisor. And – consumers should use this checklist to test out their current advisors. (Many consumers will be shocked at the results.)

If your current or prospective adviser says: “I can’t answer these questions in writing,” or “My firm won’t let me answer these questions,” or provides any other excuse for not answering these questions in writing – that’s a HUGE warning sign. The message you should take away is clear – start looking for another adviser.

As many a jurist has stated over the past few centuries - it is not possible to wear two hats at one time. Either a person is selling something to you, or that person is a fiduciary to you and thereby representing you and your interests alone. This questionnaire therefore rules out those firms - even some who possess excellent reputations - that don't practice as independent investment advisers, or whose firms are affiliated with brokerage firms or mutual fund complexes. Economic interests matter. True, bona fide fiduciaries do not possess economic ties to brokerage firms, product manufacturers, etc.

Your goal should be to work with a trusted, expert adviser who will manage your investment portfolio in accordance with the prudent investor rule, and who will keep your interests paramount at all times. Period and without exception.

Your goal is to find your "B.F.F." - your "Bona Fide Fiduciary" financial and investment adviser.

Each of these questions is designed to be easy to answer – either “yes” or “no.” If all of the answers are not “yes” – it’s time to look for a new adviser.

1. Will you (and your firm) be a fiduciary to me, under the law?

2. Will you (and your firm) be a fiduciary to me, at all times, for all parts of our relationship as advisor and client, and for all of the accounts I have with you?

3. Will you (and your firm) charge me only a reasonable fee, paid directly by me (or deducted from my investment accounts, if appropriate)? Will you also provide me with a statement of the fees paid by me to your firm each calendar quarter?

4. Will you (and your firm) not accept any material compensation from the manufacturers (mutual fund companies, insurance companies, etc.) of the investment products you recommend to me?

5. Will you ensure that I am never charged a commission (including but not limited to front-end sales loads and deferred sales charges), and that no commission (as defined previously) is never paid to you (or to your firm) in connection with any purchases or sales of investments or investment products?

[This exception is permitted: You may sell to me term life insurance (not cash value life insurance), or long-term care insurance (that has no cash value and is a tax-qualified policy), or disability insurance (that has no cash value component), provided that you fully disclose to me how much you (and your firm) are compensated in connection with such sale, and provided that you provide me with quotes from at least three different different insurance companies (and disclose the compensation you or your firm would receive from each suggested policy), and provided that none of the recommended policies are “proprietary products” (as defined in the next question). However, we should discuss whether you should credit against my advisory fees any portion of the commission(s) you receive.]

6. Will you ensure that no investment product charges me, or pays to you (or to your firm) any12b-1 fees, soft dollar compensation, payment for shelf space, or other forms of revenue sharing, or payment to sponsor any seminars or events you (or your firm) puts on?

7. Will you promise that I am never sold a proprietary product by you (or your firm)? (A “proprietary product” for this purpose is any investment or insurance product that is produced, or manufactured by, any affiliate of your firm, including but not limited to any company in which your firm or its affiliates owns more than a 2% interest.)

8. Will you ensure that I am never sold an investment product as a result of a “principal trade”?

9. Do you agree to recommend investments to me, and to design and manage my investment portfolio, during the term of our relationship, under the strict dictates of the "prudent investor rule"? In connection therewith, will you provide me with a written Investment Policy Statement, along with any other documents, in which the investment strategy recommended by you is documented, showing the support the investment strategy possesses (via extensive back testing and/or through generally accepted academic research)?

10. Will you agree to design and manage my investment portfolio with a view toward long-term tax efficiency?

11. Will you use an independent custodian (brokerage firm) to custody my assets that will send to me a monthly statement of my holdings?

12. Will you ensure that you (and your firm) will not take “custody” of my assets (except that you may deduct my advisory fees from accounts I maintain with a "qualified custodian" that is independent from you and your firm)?

13. Will you ensure that the fees and costs that I pay – both to you (and your firm) and in connection with the investments you recommend (including not only annual expense ratios but estimated transaction and opportunity costs within pooled investments) and in connection with the delivery of ongoing financial planning services - will not exceed, in total:
2.00% if I have under $75,000 in investments with your firm
1.75% if I have $75k - $200k in investments with your firm
1.25% if I have $200k-$500k in investments with your firm
1.20% if I have $500k-$1m in investments with your firm
1.10% if I have $1m to $2m in investments with your firm
0.95% if I have $2m to $3m in investments with your firm
0.80% if I have $3m to $5m in investments with your firm
0.75% if I have more than $5m in investments with your firm

14. Do you possess evidence of a minimum level of competency in association with either financial planning and/or investments, by possessing one or more of the following:
Certified Financial Planner™ certification?
Certified Public Accountant / Personal Financial Specialist designation?
Chartered Financial Analysist (CFA) designation.

15. Can you affirm to me that you have no disclosure events on your Form ADV, Part 2B? (This is an investor brochure that describes your individual adviser.)

16. Will you sign this “Fiduciary Oath” (promulgated by The Committee for the Fiduciary Standard)? And please so sign!

I believe in placing your best interests first.
Therefore, I am proud to commit to the following five fiduciary principles:

  1. I will always put your best interests first.
  2. I will act with prudence; that is, with the skill, care, diligence, and good judgment of a professional.
  3. I will not mislead you, and I will provide conspicuous, full and fair disclosure of all important facts.
  4. I will avoid conflicts of interest.
  5. I will fully disclose and fairly manage, in your favor, any unavoidable conflicts.

                Advisor Signature: ____________________________

                Firm Affiliation: ____________________________

                Date: ____________________________

15. Will you attach this form to our client services agreement, and again sign this below, thereby (by your signature, on behalf of your firm) agreeing that the terms of this form shall at all times supersede the terms set forth in the client services agreement, in the event of any conflict between the two?


In consideration for the fees you are to receive from me, in the future, and for my engagement (or continued engagement) as a client of you and your firm, you agree that the foregoing answers and representations are both true and correct. You further acknowledge that the legal consideration for entry into this agreement by you and your firm is both adequate and sufficient.

You agree that this form shall constitute part of our client relationship / services agreement, and that the terms of this form shall supersede the terms of any and all other documents evidencing the agreements between us, to the extent any conflict exists between such form and/or documents.

Advisor Signature

              Firm Affiliation: ____________________________

              Date: ____________________________

        Witness: ____________________________

        Witness: ____________________________

(Provide an original signed document to the client. Retain a copy for the firm's file.)

Consumers: For additional details regarding the questions in this form, please refer to my prior post.

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