How would you characterize your relationship with your advisor? If you’re like many investors, you have the perception that whether you’re working with a financial advisor, broker, wealth manager, financial planner, or any of the other titles that occupy this industry, they all do the same thing. But that couldn’t be further from the truth.
There are many differences between various investment professionals and financial advisors that many folks don’t understand – or more commonly, don’t care to understand. Yet those differences can make a huge impact on how your investments are managed, how you communicate with your advisor, and perhaps most importantly, what level of responsibility your advisor has when it comes to ensuring that your investments are appropriate for your particular situation.
If you’re not sure where your advisor falls, here are some fundamental issues to research, and explore with your advisor to help ensure you’re getting the advice and direction you need:
Is your advisor a fiduciary on all of your accounts?
This is perhaps among the most misunderstood issue facing our industry today. Recent government regulations now require that advisors serve as fiduciaries on your retirement accounts. This means that advisors are responsible for making sure that the advice you receive, and the investments that are recommended for your retirement accounts, are in your best interest at all times. This differs from the previous suitability rule which stated the investment had to be suitable at the time it was recommended. The rule also requires that any conflicts of interest be disclosed to the client. A conflict of interest could be that the investment being recommended comes with a commission paid to the advisor, bringing a level of transparency to the conversation.
If your advisor immediately replies “yes,” and tells you of course he (or she) is a fiduciary, dig deeper. I mentioned above that the recent rule applies to retirement accounts – meaning your 401k, IRA, and other tax deferred investments. This rule DOES NOT apply to your post-tax investment accounts (individual, transfer on death, joint accounts, trust accounts). While your advisor may be correct about serving as a fiduciary for your retirement accounts, he or she may not be giving you the full picture about whether or not that fiduciary standard is in order for your other accounts.
At Krilogy, we’ve served as fiduciaries for all of our client investment accounts under our management since day one. As independent Registered Investment Advisors, we’re held to this standard and always have been.
Now that you know there’s a difference, be sure to ask the question, then take it to the next level to be sure that all of your accounts are being managed under the fiduciary standard.
What is your advisor’s process for creating and managing your portfolio?
You’ve taken the first step to learn whether your advisor is acting as a fiduciary. You’ll now want to learn more about the process for managing your portfolio. This is very important as there is a great deal of work and responsibility that comes along with being a fiduciary. Ask your advisor the following questions:
- How will you help me determine my risk tolerance? An advisor simply asking the question doesn’t always give you the right answer, so don’t let your advisor stop there. In my experience, I’ve found that the answer I get up-front differs dramatically from the results I get when I run the client through our process. Someone may think they want to take on a lot of risk, but when I dig into it, I tend to find that their aversion to losing money far outweighs their passion for making it, which involves greater risk. They’re more risk averse than they think, and we help them see that, and create a plan to honor their risk tolerance while working towards meeting their goals.
- Are you managing my portfolio on your own, or do you have a team working on my behalf? Many advisors (even those at the largest firms) bear the sole responsibility of creating, rebalancing, making changes, and actively monitoring each client’s portfolio. Frankly, if that advisor isn’t paying attention, no one is. At Krilogy, we have a team of portfolio strategists that actively support this effort, making sure client accounts are being monitored and adjustments made as needed to stay within the established risk tolerance.
- What technology do you have in place to manage my portfolio? Technology not only automates the process, it also allows for scalability and objectivity. Many firms (even large firms) rely on their advisors to carry the bulk of the work, which can introduce human error, subjectivity, or even things being overlooked due to that advisor’s workload. The Krilogy team leverages technology to facilitate trading, stress testing, and risk tolerance assessment so that plans are created and managed properly, efficiently, and accurately.
Does your advisor have a succession plan in place?
We’re in an aging industry, and we find ourselves in a time when many advisors are nearing retirement age themselves. Chances are, you may work with an advisor who, while he or she may not be retiring tomorrow, will be retired by the time you reach that age. Yet we find that time and again, many of these advisors don’t have a clear succession plan, leaving clients in the dark in terms of what will happen when that day comes. If you haven’t already, be sure to ask your advisor what his or her succession plan is. Does the advisor have a team working on your account that can pick up in that person’s absence? Are you comfortable with that team and plan?
Furthermore, as I mentioned above, ask about your advisor’s investment in and use of technology. In many cases, older advisors aren’t interested in implementing new technology for a variety of reasons, but that in and of itself could be a sign that the advisor is nearing retirement.
At Krilogy, we’re preparing the next generation of advisors who work closely with senior advisors to help support clients, learn the business, and help with the creation of plans.
We recognize that asking these questions may not be the most comfortable thing to do, especially if you’ve had a relationship with an advisor for many years. However, it’s very important that you have a clear understanding of the issues outlined above to ensure that your portfolio – and your future – are being managed in a manner that’s most aligned with your goals and risk tolerance. That starts with your advisor taking the time to not only answer your questions, but to help you dig deep, gain clarity for what you have and where you want to go, and ultimately, do the work to help you get there, not just for today but for the long haul.