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Monday, December 26, 2016

How to Choose a Financial/Investment Adviser: A Checklist for Consumers

The following is one of my most popular blog posts, updated 12/26/2016 to emphasize the necessity for thorough diligence in one's search for an advisor and to provide further insights.

BE AWARE that there are many, many advisers who profess to offer "objective" or "trusted" advice, but who don't operate as fiduciaries. And - due in large part to a weak U.S. Securities and Exchange Commission application of the fiduciary requirements of the Investment Advisers Act - even those who are required to be "fiduciaries" by law often "disclaim away" their fiduciary obligations, or seek client "waivers" of core fiduciary obligations.

In other words, even if your adviser says "I am a fiduciary" and/or "I act in your best interests" - you need to DIG DEEPER!

This article, and checklist, can be utilized by consumers to TEST their current financial or investment adviser. Or, it can be utilized as consumers shop for an adviser. Good luck with your search!


Several readers have asked me for a list of questions which consumers can ask, when interviewing a financial or investment adviser. In forming this checklist, I emphasize that the chosen adviser should, at all times:

  • function in a fiduciary capacity, AND
  • without any waiver or disclaimer of their fiduciary obligations, AND
  • possess the requisite knowledge to provide financial planning and/or investment advice as a true expert.
Consumers should realize that some who call themselves “fiduciaries” don’t actually practice in such manner. For example, they may take additional compensation from third-parties, in situations where client harm results – an indefensible practice in my view. (The academic research is clear - all things being equal, higher product costs result in lower returns for investors. And additional compensation paid to product salespersons - whether it be from 12b-1 fees, payment for shelf space, soft dollar compensation, or other revenue-sharing practices - results in higher product costs.)

Other advisers "disclaim" away their core fiduciary duties. Fore example, many "fiduciary" advisors state that they don't provide tax advice in any form - even though a tax-efficient investment portfolio is one of the many keys to long-term success for their clients.

Hence, I suggest additional questions consumers can, and should, ask of their current or prospective financial and/or investment adviser.

[Preliminary note: The term “adviser” and “advisor” are used interchangeably. Technically a “registered investment adviser” is spelled that way, while in current United States English the spelling “advisor” is more often seen. Over the last decade the American usage has been migrating to "adviser."]


With the increased availability of bona fide fiduciary investment advisers and financial planners available today, I urge consumers to choose only those “financial advisors” (also called “financial consultants” or “financial planners” or “investment advisers” or “wealth managers” – and similar terms) who can answer ALL of the following questions correctly.

Moreover, consumers should ask their current adviser these questions. Many, many consumers falsely believe that their current financial adviser is acting in their best interests, and as a fiduciary, when such is not the case. In fact, nearly a third of consumers in the SEC’s 2008 Rand Study thought that their advisor received no compensation at all when in fact the advisor was receiving generous compensation from third parties, undisclosed to the client!


I emphasize attention to fees in this checklist. Why? First, because fees and costs are, to a large degree, controllable. Second, a tremendous body of academic research compels the conclusion that the higher the fees and costs, the lower the returns for the investor. Moreover, over a long period of time even paying 1% a year more than necessary can result in an accumulation of wealth far below that of other investors not burdened by such an incremental fee.

This does not mean, however, that knowledgeable, expert financial and investment advisers shouldn't be well-paid. It takes years and a great deal of study to acquire the knowledge and skill possessed to assist clients to identify, prioritize, and achieve their financial goals. Navigating the intricacies of the capital markets is difficult and requires substantial expertise. Expert fiduciary advisers should be rewarded with professional-level compensation. And truly expert fiduciary advisers can add value.


It is important for each investor to be completely comfortable with the investment strategy recommended by the adviser. That investment strategy is disclosed in a registered investment adviser's Form ADV, Part 2A (which is often available on the web site of the investment adviser, or is available upon request, or which can be obtained via the Investment Adviser Public Disclosure web site.

I believe most individual (and institutional) clients possess a reasonable expectation that the investment strategy which is recommended satisfies the due diligence requirements under the “prudent investor rule.” In this regard, the adviser should submit to the client, upon request, the evidence (either academic research, summarized, or back-testing in an objective manner) which supports the proof that the requirements of the prudent investor rule are met.
  • NOTE: The prudent investor rule (PIR) is a very tough standard. It requires the construction of a portfolio that emphasizes diversification in order to minimize idiosyncratic risk (also termed "diversifiable risk" or "non-systemic risk"). The PIR also requires that the investment adviser not waste the client's assets; in general, a lower-cost investment product that achieves the same objectives is required to be chosen over a similar higher-cost investment product. In this author's experience, many financial advisers either do not understand the requirements of the prudent investor rule, or they simply don't undertake the requisite due diligence (on both investment strategies, and investment products) to adhere to it.
This does not mean, however, that all investment strategies must meet the prudent investor rule.
  • The Department of Labor applies the PIR to ERISA-covered accounts, such as 401(k) and a few 403(b) accounts. Effective April 10, 2017, the PIR also applies (in most instances) to all types of individual retirement accounts (IRAs); however, challenges to such rule exist in both the courts and in Washington, D.C.
  • It is possible that a client may desire a more aggressive, or less aggressive, investment strategy be utilized - that does not meet the requirements of the PIR. Or a speculative strategy; perhaps one based upon the adviser's qualitative macro-economic analysis. Investment strategies flowing from qualitative analysis are difficult to "back-test" - and nearly always cannot be supported by quantitative academic research.
In fact, only a few specific investment strategies for an overall portfolio (or for the equity or fixed income or other parts of a portfolio) likely currently meet the prudent investor rule – at least to level of the Daubert standard under which an expert witness would be able to testify to that effect in court.

Hence, when a strategy is utilized which does not meet the dictates of the prudent investor rule, the additional risks inherent in such strategy should be disclosed to the client, and the potential rewards also explained. Such an explanation should be thorough, in my view, given the importance of this issue.


Don’t take any excuses here. As a consumer, it is very difficult to later prove what is not in writing. Require your (prospective or current) financial adviser to place his or her answers to these questions in writing. If they don’t or won’t, chances are they have something to hide, and don't want to reveal the truth about their practices.

If you cannot obtain the answers to these questions in writing, then just walk away!

  1.  Are you a fiduciary under the law, and will you continue to be my fiduciary at all times during the adviser-client relationship we will enter into, and with respect to all of my accounts with you and all of the advice you provide to me?
Mandatory response – “Yes.”  

If the adviser is unwilling to act as a fiduciary to you – i.e., meeting the standard of due care as an expert adviser, acting with the highest degree of loyalty to you and in your best interests at all time, and with complete candor and truthfulness – this adviser does not deserve your consideration. Period. End of story.

Explanation.  There are two types of relationships under the law:
  • Fiduciary relationship, in which the adviser acts on your behalf, “stepping into your shoes” and always acting in your best interests; or
  • Salesperson/customer relationship - the person before you  seeks to use planning, education or advice as a means of selling products to you. In this instance the person is not a fiduciary. While “suitability” applies (“everything recommended to you will be ‘suitable’ for you”), this is a very low standard that does not require that the best investment products are recommended for you (in fact, many very expensive, poor products are recommended under the suitability standard).
There are many in the legal community who believe that “financial advisors” should not seek to act as both a “fiduciary” in some aspects of the relationship with the client, while not in other aspects of the relationship. This is called the “wearing of two hats.” Indeed, many a jurist has opined that a true fiduciary cannot wear two hats. The roles of "seller" and "purchaser's representative" are simply diametrically opposed.

Nor should a fiduciary try to remove the “fiduciary hat” once it is placed on. Can you just imagine this conversation: “I am now a fiduciary, required to act in your best interests. I want your permission to not be a fiduciary anymore, so I am no longer required to act in your best interests.” WHY WOULD ANY CONSUMER (who is informed about the necessity of fiduciary status) EVER PERMIT THEIR ADVISER TO TAKE OFF THEIR FIDUCIARY HAT - AND NO LONGER OPERATE IN THE CONSUMER'S BEST INTERESTS?

Please note that many a salesperson will try to convince you – the consumer – that “requiring me as your adviser to act as a fiduciary will be more expensive for you.” Don’t buy this false argument. In fact, only fiduciaries have the requirement to ensure that all of the fees and costs you pay are reasonable. In my experience, nearly always (99% of the time) the total fees and costs paid by clients relating to their investments and the advice they receive are substantially lower when a fiduciary adviser is utilized. In contrast, the fees and costs present when a non-fiduciary adviser is utilized are often hidden and often clearly excessive.

Another argument sometimes made by non-fiduciary "advisers" is: “The only way this product can be obtained is through a sales process, not as a fiduciary.” This excuse is often asserted when life insurance, long-term care insurance, or other forms of insurance are sold.

Beware cash value life insurance. Yet, cash value life insurance (i.e., "permanent life insurance" should ONLY be sold when a permanent insurance need exists, in this author's view. Whole life, universal life, equity-indexed universal life, and variable universal life are simply too costly to warrant consideration as investment vehicles. In the absence of a permanent estate tax liquidity problem (rare today, given the nearly $6m per person estate tax equivalent exemption, and spousal portability), cash value life insurance should NOT be obtained by consumers. Term life insurance (with a conversion feature) is much more appropriate.

Beware annuities! Another product that is often sold on a commission basis are annuities. Yet, there do exist low-cost variable annuities and low-cost immediate fixed annuities, that pay no commissions. (Equity index annuities, also called fixed index annuities, are nearly always sold on a commission basis; however, as of the time of this writing - Dec. 2016 - this author has not yet encountered any equity index annuity product that meets the author's due diligence test. The problem with equity indexed annuities is not the concept behind the product; rather, the problems include the design of the annuity product that puts far too much control in the insurance company, imbeds too high a cost structure within the annuity, and in many cases the relatively low financial strength of the insurance company).

A lot of other excuses will often be provided, which don’t hold water. Such as, “I am a bound to represent the interests of my firm, to whom I possess a fiduciary duty. That may be true, but it is possible to order fiduciary relationships. In other words, there is NO REASON both the firm and the individual adviser cannot possess a fiduciary duty to act in your best interests, and any duty owed by the individual adviser to the firm can be subservient. Many, many advisers already operate this way!

If your adviser asserts any other “reasons” for why he or she cannot act at all times as a fiduciary to you and bound to act in your best interests, you as a consumer should realize this … there are many, many other investment and financial advisers out there who will promise to be a fiduciary to you at all times. In essence, don’t fall for any rationale a non-fiduciary adviser gives for not adhering to the fiduciary standard – there simply is no good reason for an adviser to not act in a fiduciary capacity to you at all times. Any “explanation” for why he or she cannot – while it may sound plausible to you – will not hold up under expert scrutiny.

2. What services will you provide?  Can “financial planning” advice be separated out from your “investment advisory” services?

Mandatory Answer:  Get the list of services provided in writing. These are usually set forth in the written advisory contract you are required to sign.

Review that contract carefully – and make certain you understand all of the services you are receiving (or not receiving). Discuss each service with your advisor. Have your advisor revise the written agreement to reflect any detail, as to services provided, which might not yet be in the document.

If you are receiving advice relating to financial planning issues (e.g., tax planning, how much to contribute to various types of accounts, how much to withdraw from various accounts, retirement planning, estate planning, insurance planning, etc.), ask if you can pay for such services separately – through a negotiated flat project fee, or an annual retainer, or for hourly fees. Compare the fees for the financial planning services you require to those of other firms.

For investment advisory fees – where an advisor undertakes an “asset allocation” for you, chooses asset classes to invest in, recommends specific securities or investment products to you, and/or monitors your investments and undertakes periodic or targeted rebalancing and/or tax loss harvesting – fees can vary tremendously. Find out how much the investment advisory fees are, and compare fees for similar services offered by other firms.

While many firms choose to “bundle” their fees for financial planning and investment advice, in the view of some industry observers a better approach is to charge for these two types of services separately. Although financial planning and investment advice are inherently related, they can also be “unbundled” – at least to a large degree.

Often a financial plan is a prerequisite to the design and management of an investment portfolio. The adviser cannot really know how to design an investment portfolio for you until after other issues have been addressed, such as: “Should you pay down debt instead of investing?” or “Do you have an adequate cash reserve?” Hence, at least some financial planning is, in my view, required prior to designing an investment portfolio.

Yet, more comprehensive financial planning services can usually be "unbundled" or separated from investment advisory services.

More comprehensive financial planning can also be undertaken in a variety of different ways:
  • For clients with greater planning needs, realize that the financial planning process, for a new client, can take time. It may be a “comprehensive financial plan” presented all at once, or the financial planning recommendations may be presented and reviewed in a series of meetings in which certain specific issues are addressed at each meeting.
  • After an initial financial planning is undertaken, for some clients revisions to that plan may not be required for several years (absent some change in your circumstances). In such a circumstance, expect to pay more for financial planning in the first year, and less in subsequent years.
  • For most clients, however, financial planning needs are ongoing. In this sense, financial planning is not an "event" or a "plan" - but rather a "process." Financial life coaching is often provided under these types of arrangements. Ongoing tax advice is also likely to be provided.
In contrast to financial planning, investment advice is easier to compare. In essence, investment advisory fees reflect the same approximate level of service each year to most clients. Some advisers believe that every client, large and small in terms of size of the client's portfolio, should be charged the same amount, as the time spent on investment advice does not vary tremendously from one client to another. I would argue that, since an investment adviser bears more responsibility for larger accounts, some increase in fees is merited as the account size grows larger.

3. What conflicts of interest do you, your firms, or any affiliated firms possess with respect to the advice you may provide to me? Do you or your firm receive any material third-party compensation when I choose your investment advisory services or invest in investment or insurance products recommended by you?

Mandatory Answer – “Neither our firm, nor any affiliates of our firm, nor any of our individual advisers, receive any material compensation from third parties. All advisers may possess a conflict of interest that arises from time to time, but we seek to keep our conflicts of interest to a minimum.”

Explanation: If your adviser receives payments from a mutual fund, brokerage firm, or other source, whether called a 12b-1 fee, "revenue-sharing payment," or otherwise, when recommending an investment to you, this represents an insidious conflict of interest.

True fiduciary advisers know that the mere receipt of material compensation from anyone else, other than the client, could influence them (consciously or unconsciously) when they make a recommendation to you. This means that the adviser may not be acting in your best interests, but rather in the adviser’s interests. And, as explained below, fees and costs matter.

Your investment adviser’s Form ADV, Part 2A sets forth any conflicts of interest your adviser may possess. Nearly all financial and investment advisers possess some conflicts of interest. For example:
  • Should you invest funds you possess, or pay down debt instead?
  • Should you make lifetime gifts to others, and if so how much?
  • Should you purchase a lifetime immediate annuity?
Decisions resulting from these and other questions might affect the level of investment assets managed by your adviser, and hence the compensation your adviser receives. The proper way for an adviser to manage such unavoidable conflicts of interest is to ask himself or herself: "What advice would I give to my mother, father, brother, sister, children, nieces or nephews, if one of them were the client in this instance?" Additionally, advisers can check with other advisers, when a conflict of interest occurs, to seek confirmation that the advice they are providing is not skewed by any unavoided conflict of interest.

Note that educational and other services or software are often provided to advisers by custodians (brokerage firms your adviser may work for, or with) or mutual fund or other companies. Your adviser should fully disclose these conflicts, in writing, as well as whether in the adviser’s view the amount of benefits received by the adviser might skew the advice provided to the client. Typically the amount of non-monetary benefits received is very minor, compared to the revenue of the adviser or his or her firm.

There are some forms of third-party compensation which, in my view, should be avoided at all costs by fiduciary advisers (and their firms, and any affiliated firms).  These include:
·     12b-1 fees;
·     Payment for shelf space;
·     Soft-dollar compensation;
·     Sponsored trips to educational or other conferences;
·     Payment toward the costs of client marketing seminars; and
·     Any prizes or awards provided by custodians (typically, brokerage firms at which client assets are held) or product manufacturers.

4. Will you be recommending any “proprietary products” to me?  Will you be engaging in any “principal trade” with me?

Mandatory answer – “No.”

Explanation. A proprietary investment or insurance product is one that is manufactured by the firm you are dealing with, or affiliated firms. While all of these products are not necessarily “bad,” in my estimation at least 95% of proprietary products are not the best products available in the marketplace today.

Moreover, the simple truth is that proprietary products result in additional compensation to the adviser or his/her firm. While some fiduciary advisers credit all or part of the management fees of proprietary mutual funds to the client’s account, often the administrative fees (which are not credited to the client’s account) paid to other affiliates of the fund complex are excessively high.

The truth of the matter is that fiduciary regulation in the United States has not yet evolved sufficiently to place strict and proper limits on the utilization of proprietary investment products by fiduciary advisers. There is no requirement, for example, that a fiduciary adviser demonstrate that there is no other product better or as good as the firm’s proprietary product prior to recommending same.

Hence, at the current time the recommendation of proprietary products is another insidious conflict of interest which can, and should be, avoided. With thousands and thousands of mutual funds, ETFs, and other investment products available today, it is likewise hard to imagine that any one firm’s products are all “best-in-class” investments – or for that matter than even one such product is likely to be the “best-in-class” investment.

Likewise, it is difficult to imagine, when thousands of dealers in securities exist, and with such a broad selection of products to choose from, that any firm needs to sell you investment products out of their own “inventory.” Even in the fairly illiquid municipal bond market there are normally many, many sources of bond inventory. The fact is that broker-dealer firms make a lot of money from “principal trades” – much more so than acting as your agent to secure the best possible price for you. And “dumping” of unwanted securities by a firm is, unfortunately, far too common an occurrence. Again, this is an area where enforcement of securities laws has been far too lax when the advisor acts in a fiduciary capacity. The U.S. Securities and Exchange Commission and state securities regulators permit far too much abuse to occur – to the harm of tens (if not hundreds) of thousands of individual investors.

There is only very rarely (less than 1%, if that) any valid reason for a fiduciary adviser to engage in the sale of proprietary products or recommend a trade between you and her or his firm. “Just say no” to proprietary products and principal trading.

5. What are the “total fees and costs” I will pay with regard to my investment portfolio – including the fees and costs charged by the products you recommend, as well as your own advisory fees – on an annual basis?

Answer:  A very thoughtful, well-researched presentation of the “total fees and costs” of the advisory services, and of the products recommended to you, should be presented to you, in writing. You should be able utilize this "total fees and costs" analysis as a comparison tool to other service providers.

Here’s a suggested maximum amount of the total fees and costs for investment advisory services for different sizes of an investment portfolio. There are many investment advisers who provides investment supervisory services for less than the TOTAL FEES AND COSTS shown below:

Size of the Portfolio
Maximum Total Fees and Costs: Includes the Investment Adviser's Fees, and Product Fees (both the Annual Expense Ratio as well as estimated transaction and opportunity costs that exist within pooled investments such as mutual funds and ETFs)
Under $75,000
2.00% or less
$75,000 to $200,000
1.75% or less
$200,000 to $500,000
1.25% or less
$500,000 to $1,000,000
1.20% or less
$1,000,000 to $2,000,000
1.10% or less
$2,000,000 to $3,000,000
0.95% or less
$3,000,000 to $5,000,000
0.80% or less
Over $5,000,000
0.75% or less

NOTE: The following should be included in any "total fees and costs" analysis provided to you:
  • The effect of sales loads (commissions) for the holding period of the investment product (or, for a maximum of 10 years);
  • The annual expenses, as shown in any disclosure of "annual expense ratio" or similar. For a mutual fund, these might include:
    • fund management fees;
    • fund administration costs;
    • 12b-1 fees;
  • The "implementation shortfall" costs of management of any pooled investment fund, which can be estimated by a firm or adviser for each fund the firm/adviser recommends. These might include:
    • Market impact costs;
    • Bid-ask spreads and/or principal markups/markdowns;
    • Opportunity costs due to delayed or canceled trades;
    • Brokerage commissions paid for effecting securities transactions within the pooled investment fund;
  • Opportunity costs due to maintenance of cash holdings within a fund;
  • Offsets to fees occurring due to securities lending ratios;
  • Costs of hedging the portfolio, if hedges are utilized; and
  • Costs likely to be incurred if redemption fees apply.
NOTE: The above fee table does not include fees for extensive financial planning services, which services - if provided - might be "unbundled" and charged separately.

Explanation. Fees and costs matter. As the founder of Vanguard Funds and consumer advocate John Bogle recently stated, “the magic of compound returns is overwhelmed by the tyranny of compounding cost. It’s a mathematical fact.” In his article, "The Tyranny of Compounding Costs," John Bogle used the following illustration. If an individual made a $1,000 investment at age 20 and received 8% annualized returns, the account balance would grow to $109,358 by age 80. If a 2.5% annual management fee was added into the equation, the ending account balance would only be $26,206. Over the 60 years, these annual management fees eat up a staggering 76 percent of what the investor would have earned with no management costs.

Many investment advisers would argue that the “total fees and costs” I propose in the table above are far too low. Yet, there are many investment advisers out there who offer good investment advice and who utilize low-cost products for “total fees and costs” within the levels set forth above, and often for far less.

What is included in the “total fees and costs”? Every fee or cost present, whether "disclosed" or "hidden," and whether quantifiable or which is subject to estimation. For example, with respect to stock mutual funds and stock exchange-traded funds these fees and costs include:
  • The advisor’s separate advisory fee (whether paid as a percentage-of-assets managed fee, as a flat annual retainer, as a project fee, or on an hourly basis);
  • The mutual fund’s annual expense ratio – which is the sum of the fund’s management (investment advisory) fee, administrative fees, and 12b-1 fees (which, as I’ve noted above, should be avoided);
  •  The mutual fund’s brokerage commissions resulting from trading within the fund (these can be discerned and quantified by an expert advisor) - an up-front commission might be divided by 10 to determine the long-term impact of the commission (i.e., in determining the annual impact of the commission); a higher denominator might be utilized if the mutual funds sold are not typically held for 12 years or longer).
    • What greater annual rate of return must a 5.75% load fund earn, ali other things being equal, if the benchmark earns a level 10% annually, to break even with the benchmark?
      • If the fund is held for only 5 years, the fund must earn 1.20% more, each year, over that period, to "break even."
      • If the fund is held for 10 years, the fund must earn 0.59% more, each year, over that period, to "break even."
      • If the fund is held for 15 years, the fund must earn 0.43% more, each year, over that period, to "break even."
      • If the fund is held for 20 years, the fund must earn 0.32% more, each year, over that period, to "break even."
      • If the fund is held for 25 years, the fund must earn 0.26% more, each year, over that period, to "break even."
    • Note that the average holding period for stock mutual funds is about 4 years, and for bond mutual funds less than 3 years, according to the Investment Company Institute.
    • Since rebalancing of an investment portfolio requires selling asset classes (and funds within them) that go up in value, while purchasing those asset classes that have lagged, even a "buy-and-hold" strategy requires some sales of mutual funds, over time.
    • In essence, in this author's view, commission-based product sales are inconsistent with the prudent investor rule, specifically, and inconsistent with Modern Portfolio Theory in general.
  • The mutual funds’ transaction and opportunity costs, relating to trading within the fund. Market impact and transaction costs can be estimated by an expert advisor, based upon the level of trading volume actually occurring within the fund and based upon the asset class in which those stocks are located. Opportunity costs due to cash holdings within the fund can likewise be estimated.
Consumers should request that their advisor provide to them, for each investment product recommended, a break-down of all of the estimated fees and costs. This “point-of-recommendation” document should not just be the prospectus, but rather a one-page summary detailing not only the disclosed fees and costs associated with the advisor and the investment product, but also an estimate of any hidden fees and costs.

Note that all consumers should avoid any investment in a product in which fees are presented as either a “commission,” “sales load,” “contingent deferred sales charge,” “surrender fee,” “12b-1 fee,” or “marketing fee.” Fiduciary advisers simply avoid products that incur such forms of fees, as they create otherwise avoidable conflicts of interest and/or result in unnecessary fees or costs incurred by the investor and/or restrictions on liquidity.

Many consumers assume that higher-cost products mean higher returns. THIS IS A FALSE ASSUMPTION. Substantial economic research reveals that the higher the fees and costs the lower the returns to the investors. When an adviser says, “Yes, it’s expensive, but it’s good,” or if the adviser says, "Overlook the (high) fees and costs, and consider the benefits," don’t believe it. Every investment adviser worth her or his salt knows of the overwhelming academic evidence demonstrating that higher fees and costs generally result in lower returns for the investor.

By way of further explanation, suppose your horse (investment product, with any adviser fees attached) is running in the Kentucky Derby. Shortly before the race begins, your jockey is required to wear a vest containing lead weights, so that the weight of your jockey (and clothing) now exceeds the weight of the other jockeys (and their clothing) by fifty pounds. Does this mean that your horse cannot win the race? No. Perhaps, occasionally, an exceptional horse so saddled with the extra weight will rise to the occasion and win. But, nearly always, this makes the horse with the heavier burden extremely likely to run in the back of the pack, especially as the horse race get longer. Don’t hire heavy jockeys, or saddle them with extra weight!

In summary, don’t let Wall Street siphon off a huge portion of your returns. Keep your total fees and costs reasonable, and reap the substantial rewards of a low-cost, prudent investment strategy over time. Require your advisor’s fees for investment advice to be reasonable, and further require your investment adviser to choose only those investment products which possess low total fees and costs.

6. What are your qualifications?

Answer: A list of the adviser's qualifications.

I recommend that consumers receive advice from only expert financial advisors and/or investment advisers. How can a consumer judge this? It’s difficult.

One way to assure at least a baseline level of competency is to seek out certain certifications or designations. There are hundreds of financial services designations out there, but in my view at the present time there are only three baseline designations or certifications that a consumer should seriously consider:

  1. Certified Financial Planner™ (CFP®). This certification indicates a broad base of foundational knowledge in all areas of financial planning. The minimum requirements to attain the certification include a 4-year college degree (in any field), six foundational courses (each a 3-semester-credit hour equivalent) in financial planning and investment topics, the passage of a tough 6-hour national exam, and adherence to the CFP Board's conduct standards. This is the most well-known (from the standpoint of consumers) of the various designations in financial services.
  2. Certified Public Accountant / Personal Financial Specialist (CPA/PFS). Roughly equivalent to the CFP® certification in terms of the required knowledge of financial planning subjects. But, the designee must also be a Certified Public Accountant. This typically indicates a solid knowledge of finance and individual income taxes - both areas that often propel CPA/PFS holders to be some of the best financial planners out there, on average.
  3. Chartered Financial Analyst (CFA). This designation is the toughest to obtain. Recently more "wealth management" topics have been embedded into the course of study, which requires significant study over the course of 1.5 to several years and three day-long tests along the way. However, the focus of the course of study remains on investment theory and principles. Nevertheless, for those within the investment advisory industry, this is generally the most respected designation - even though consumer recognition of the designation lags.
Again, each of these programs requires a rigorous course of study, usually involving thousands of hours of work for an advisor who completes the program.

However, please note - rely upon these designations ONLY for their indication of competency. Not all holders of these designations practice as "bona fide fiduciaries" in my view.

This is not to say that there are not some fine – and exceptional – financial planners and investment advisers out there who don’t possess any of the foregoing marks. For example, there are some older advisors who began practice while these designations were of much less import than they are today.

Nor do I say that other designations and certifications are unimportant. Yet, far too often designations can be obtained after passing a course of study in which the time commitment is measured in terms of “two days” or “fifty hours of study” or just a few hundred hours of study. If an advisor touts a designation not on the list above, as a “comprehensive” knowledge base, research the designation and see if it requires thousands of hours for completion of the required course of study, as the foregoing designations likely require of most applicants.

7.  Have you ever been cited by a professional or regulatory governing body for disciplinary reasons?

Mandatory answer: Here is my record, which includes any disciplinary history by any professional oversight regulator or organization.

Disclosures of disciplinary history can be found in Form ADV, Part 2B (the “Biography” disclosure document of an investment adviser), and on the advisor’s Form U-4. Ask for and review both of these documents.

A consumer can conduct an online check of an advisor’s disciplinary history through the FINRA BrokerCheck® at This provides the information found on an individual adviser's U-4. (Note: those individuals licensed solely as insurance agents do not appear in this database.)

There has existed ongoing controversy over the number of "expungements" of complaint history which are permitted by the broker-dealer self-regulatory organization, FINRA. Hence, the absence of the indication of a complaint in the database does not ensure that no complaint was ever filed against the person. Perhaps one way to counter excessive expungements is to do a Google search of the adviser's name (perhaps with the name of her or his firm, and/or her or his location - such as town or city - of her or his office). However, since many firms have mandatory arbitration agreements, and seek to keep arbitration awards "secret" (i.e., non-disclosed to the public), a Google search is not a guarantee, either.

8. Will you sign this fiduciary oath?

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:                            ____________________________
                Firm Affiliation:              ____________________________
                Date:                                 ____________________________

Mandatory answer: “Yes.”  If not – walk away.

Explanation: This Fiduciary Oath is from The Committee for the Fiduciary Standard, a volunteer group of individuals who advocate for the fiduciary standard of conduct before Congress, the U.S. Securities and Exchange Commission, U.S. Department of Labor, and other agencies. There is not a single word in this document which any fiduciary advisor should find objectionable.

(By way of disclosure, I currently serve on the Steering Group for The Committee for the Fiduciary Standard. I receive no compensation for performing this role, nor any ownership interest in the organization, which is composed solely of volunteer members.)


There are other obvious questions any consumer would want the answer to.  These include:
  • How long have you been in business?
  • How many clients do you possess?
  • Do you engage in any other business activities?
  • In what accounts (i.e., with what custodian) will my investments be held? What safeguards exist to ensure my funds are not stolen?
  • Who in your firm will be working with me? You? A junior advisor? A team of advisors? Others?
Since each of these answers has no clear “yes” or “now” or other quantitative answer, the consumer should take any responses provided and compare them to answers other advisors provide.

Again, I stress that these answers should be obtained in writing from your financial/investment adviser and/or her or his firm. Far too often in arbitration proceedings verbal statements made by advisers, to their clients, are not admitted into evidence, as the contract (client services agreement) signed by the client contained a "merger" clause. More often than not, in arbitration proceedings verbal statements made by the advisor are also denied. Get it in writing!


There are now five industry organizations which, in my view, have established and maintained high standards of competence and ethics for their members - i.e., their members are obligated to act as bona fide fiduciaries, and in practice the members of these group seek to avoid most major conflicts of interest. 

Consumers searching for an adviser are much more likely to find advisors who correctly answer all of the questions above by visiting these web sites:
National Association of Personal Financial Advisors ( – and specifically its “Find An Advisor” search function located at  (By way of disclosure, I am a NAPFA academic member, previously served on its National Board of Directors, and currently serve on its South Region Board of Directors. NAPFA has over 2,500 advisers around the U.S.))

Garrett Planning Network ( – and specifically its “Search For Advisors” search function located at (By way of disclosure, I serve as a consultant to, and as a member of, this organization, which has over 300 advisers around the U.S. as of March 2016.)

Garrett Investment Advisers ( - and its "Find An Advisor" search tool. (By way of disclosure, in March 2016 I transitioned by own practice into this firm, which has a few dozen advisers around the U.S. as of March 2016.)

XY Planning Network ( - and its "Find An Advisor" search tool. This organization has grown rapidly, and has over 200 firms as of March 2016.

Alliance of Comprehensive Planners -, and specifically to its "Find an Advisor" search function located at The Alliance has a few hundred advisers, I believe, as members as of March 2016.

What About the CFP Board and the Financial Planning Association? Be aware that being a certificant (with the Certified Financial Planning Board of Standards, Inc.) may guarantee a baseline level of competence, but does not ensure that the advisor follows a bona fide fiduciary standard at all times.

Nor does membership in the Financial Planning Association ensure that the advisor follows a bona fide fiduciary standard at all times.

While both of these organizations provide valuable benefits to their members, and both organizations promote adherence to high professional standards of conduct, in this author's view consumers should not rely upon the "find an advisor" tools of these organizations.

Likewise, several other organizations often tout the "fiduciary status" of their members, or state that their members are required to act "in the best interests" of the member's clients. As indicated earlier in this post, there has been a denigration of the fiduciary standard over time - some would say an evisceration. Hence, it is important to not assume that just because someone calls themself a "fiduciary" or states that they will "act in your best interests" does not necessarily mean that they adhere to the highest standards of prpfoessional conduct. Use the questions above to determine if the person is a true, bona fide fiduciary who avoids (rather than just discloses) conflicts of interest, and who is a true expert, and not a mere "pretender."


The most important financial decision an individual investor can undertake is in selecting the right financial and investment advisor.

I hope that the checklist above, and other information provided, can serve to guide consumers in the right direction - toward true fiduciary advisors who are both experts and keep their clients' best interests paramount at all times.

All consumers should interview several advisers before deciding. Fees and costs are a primary determinant, but not the only one. Expertise should be ascertained. And the adviser's investment philosophy should be aligned with your beliefs and comfort level.


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