In Selecting a Financial Advisor, Do You Want What is Best or Just Suitable?

In selecting and working with a financial advisor, there are many factors you may consider. One of the key items you should consider is how your advisor makes his or her decisions. What motivates those decisions?

Our firm is very clear on this: All of our advice and recommendations are based strictly on what is in the client’s best interest. Period.

We do not base our advice on anything else. We do not accept commissions. We do not charge sales fees. We do not get compensated from investment firms or mutual funds that we recommend. We recommend only what is in the best interest of each client.

It is important for you to understand this concept, because not all firms that provide financial advice adhere to the same high standard that we do.

It is important because many large financial firms, such as the major brokerage firms that advertise on TV and in major newspapers, are not held to this very high standard of practice.

Our firm is subject to a fiduciary standard, which means that our decisions must be made in your best interest. Your interests must always be ahead of our financial interest. And that’s how you would want your advice and recommendations to be made, right? And that is how we want our decisions to be made.

With this high fiduciary standard, there are no conflicts of interests in our recommendations. We do what is best for the client.

Brokers at the major brokerage firms do not have to meet this high fiduciary standard. They have a lower standard, called a suitability standard. This lower bar does not put the client’s interest ahead of the broker. The broker’s loyalty is first to the brokerage firm. The client’s interest can legally come later.

An example of this inherent conflict, from the website

The suitability standard can end up causing conflicts between a broker-dealer and underlying client. The most obvious conflict has to do with fees. Under a fiduciary standard, an investment advisor would be strictly prohibited from buying a mutual fund or other investment, because it would garner him or her a higher fee or commission. Under the suitability requirement, this isn’t necessarily the case, because as long as the investment is suitable for the client, it can be purchased for the client. This can also incentivize brokers to sell their own products ahead of competing products that may be at a lower cost.

This issue of financial advisors and brokerage “standards” is becoming a political issue in Washington, as various regulatory matters are being addressed. We want you to know which side of the issue we are on, which is the highest standard of care for our clients.


Why We Recommend a Globally Diversified Portfolio

We recommend a globally diversified portfolio because….

Sometimes large company stocks outperform small company stocks

Sometimes small company stocks outperform large company stocks

Sometimes US stocks outperform International stocks

Sometimes International stocks outperform US stocks

Sometimes value stocks outperform growth stocks

Sometimes growth stocks outperform value stocks

Sometimes real estate company stocks outperform all of them

And some years real estate company stocks underperform other investments.

Because no one can reliably know which asset class will do the best or worse in the future, we recommend owning all of them in a globally diversified portfolio.

This strategy will also prevent big mistakes, like trying to time a certain sector, industry or geographic region (like investing heavily in oil company stocks a year ago).

This strategy will provide you the best opportunity to have a successful investment experience over the long term.

What is Quality Financial Advice?

Determining quality can be easy or difficult, depending on what is being evaluated. After you finish a restaurant meal or have had a new watch, sweater or television set for a while, you can determine if you have experienced good quality. But how do you evaluate the quality of financial advice or an investment portfolio?

Defining the quality of financial advice can be more challenging, as it is not a tangible item that you can touch, feel and see. The time perspective is also very different, as financial advice and its benefits occur over a long period of time.

Financial advice can be measured in various ways. The quality of finance advice can be measured from a wide angle lens or perspective. Is the advice that you are receiving moving you towards your life and financial goals? Are the conversations that you are having with your financial advisor addressing your needs and concerns?

Is your advisor understanding you? Is your advisor assisting with issues beyond just investments, to provide you peace of mind with insurance, estate planning or charitable giving matters (depending on your personal issues)?

Do you feel that you and your advisor have developed a trusting relationship, in which your advisor is acting solely with your best interest in mind? Is your advisor making recommendations based on what is best for you, and not providing advice that is influenced by any commissions or fees that he or she may receive? (Note: we are not compensated by any commissions or fees, other than our advisory fee).

In terms of implementing your financial plan, you can then evaluate the quality of the advisor’s recommendations by using a different perspective, which is more quantifiable. You can measure and track the performance of the investment recommendations, against appropriate benchmarks. This should be done over a long period of time, which would be years, not months or quarters.

In evaluating our investment recommendations, we monitor how the mutual funds that we recommend perform against their respective benchmarks over various time periods. As independent advisors, we recommend many DFA mutual funds (Dimensional Fund Advisors). We don’t recommend them because we are compensated by DFA; we are not. We do not recommend them because DFA has grown to become the 7th largest mutual fund company in the US. Our recommendations are based on adherence to a disciplined investment philosophy. The funds deliver what they promise to do, which is to consistently perform well in each asset class that it is invested in, over a long period of time.

To measure quality, you will need to use different perspectives to evaluate different things. In measuring an investment advisor relationship, there are many components. We strive to continuously learn, to improve, to understand our clients and to provide them with the best investment and financial planning recommendations that are appropriate for their personal needs.

Note: Thanks to Jason Womack, who’s excellent Leadership Retreat I attended last weekend. Jason provided the context to think about quality and the different perspectives of measuring quality.

My New Favorite Quote

A person’s success in life can be measured by the number of uncomfortable conversations he or she is willing to have.

I saw this quote recently, by Tim Ferriss.   The more you think about it, the more powerful this quote is.

What are the uncomfortable conversations you need to have?Carl Richards Sketch - Decisions That Lead to Great Conversations

What are the issues you need to think about? What are the unresolved issues you can work on, if you talked about it with someone?

How could your financial life be better, if you had a conversation?  Even though you may be anxious or worried about it, before the conversation, wouldn’t having the conversation be worthwhile?

What this quote means to us is that the more you actually deal with things that are hard or that you are procrastinating on, the better off you will be.

If you have concerns about your estate planning, you need to talk about it.

If you are worried about your cash flow or whether you will have enough money to live on and maintain your desired lifestyle, then you need to begin a conversation.

Whatever the issue you have, and we all have them, by talking to someone, you will begin the process of dealing with the issue. From that first conversation, however difficult or uncomfortable it may seem ahead of time, you will begin the process of resolving something.

And that is the key. From uncomfortable conversations and confronting things that are hard to deal with, comes progress and solutions.

We are here to have these conversations with you. We want to help you address and resolve whatever issues and concerns you may have. Because once you have these conversations, you will feel better.