Trust, But Verify

All financial advisors have an inherent conflict of interest: They need to generate revenue and income from the same assets that you need to achieve your financial goals. Legitimate advisors, who are registered investment advisors or investment advisor representatives, are financial fiduciaries; they are supposed to put your financial interests ahead of their own. Nonetheless, this largely unenforceable regulation does very little to protect you from less ethical advisors.

You can get an annual physical to measure the health of your body. Measuring the health of your relationship with an advisor is not so easy. Your advisor controls all the information you need to assess your relationship, and there are no disclosure requirements. It’s legal for your advisor to withhold information that would impair his or her ability to make money from your assets.

Bottom line: It is the personal ethics of your financial advisor that protects you from bad financial advice, bad investment products and bad results. So how do you know if you have a healthy relationship with an advisor who puts your interests first?

The answer is based on one business practice—transparency—and three types of financial information: expenses, relative performance and risk exposure. The health of your relationship can be measured by what he does and doesn’t disclose.


How much information does the advisor volunteer about his credentials, ethics, business practices, expenses, services and results? Is the advisor willing to document this information? When your financial health is at stake, trust what you see and not what you hear.

How do you uncover withheld information? You have to ask the right questions and know good answers from bad ones.

Layers of Expense

Your advisor should voluntarily disclose every dollar of expense that is deducted from your accounts. He should also disclose who got the money and what advice or service you receive for each deduction.

Expenses have a major impact on your net performance, but the cost they exact goes much deeper than that. A lot of advisors do not want you to know how much money they make from your assets. You may not be concerned about expenses when you are earning double-digit returns, but if you’re earning flat or negative returns, your advisor is making more money from your assets than you are.

Relative Performance

You should receive monthly, quarterly, year-to-date and annual reports that document your performance. The report should provide performance data that is gross and net of all fees so you can see the impact of expenses on your results.

Your advisor’s performance report should also compare your results to a benchmark that reflects how your assets are invested. Relative performance is more important than absolute performance. For example, your stock investments are up 10 percent for the year—sounds good. But what if the stock market was up 20 percent?

Risk Management

Advisors don’t like to talk about risk. They’d much rather talk about how much money you’ll make when their advice produces positive returns. And it’s been easy making money in equities since 2009. The stock market has produced six straight years of positive returns. Interest rates are sitting near historical lows. The economy is growing, and unemployment rates are down.

But the good times won’t last forever. Do you believe your advisor’s risk management strategy will protect you in the next down market? Now is the time to prepare.

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