Does it Matter What Type of Financial Advisor You Work With?

The financial services industry is a very crowded space. With so many “advisors” to choose from, how do you distinguish what type of financial advisor you are working with? How do you know who you can trust with your money? In our experience, many so-called “financial advisors” are nothing more than glorified salespeople with a clever title. The investments they sell have a direct correlation with the compensation they receive. Given those dynamics, what are the odds that you will receive objective advice? Don’t be fooled. The following guide will help you make more informed decisions on how advisors are compensated.

Stockbrokers

Commission-based advice is great, if you’re a broker or brokerage firm. For the investor, however, it’s not always the right solution. In our experience, the products sold through this type of advice have been plagued with high costs and opaque disclosure—the higher the costs of an investment, the worse its performance will be. When a stockbroker is paid based on the products he recommends, his interests may not always be aligned with those of the client. The Broker-Dealer, for which a registered representative (stockbroker) works - unlike a Registered Investment Adviser - has no fiduciary duty to place the client’s interests first. As with any type of advice, inadequate disclosure coupled with conflicts of interest has resulted in a fair number of people who have been victimized by bad advice.

Because the commission-based fee structure of broker-dealers presents the conflicts of interest described above, the SEC requires them to add some variation of the following disclosure to your client agreement. Read this disclosure, and decide if this is the type of relationship you want to inform your financial decisions:

“Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by product and over time.”

If this disclaimer appears in agreements you are signing, you should ask questions of your advisor. Obtain complete disclosure about how he or she is compensated, and where his or her loyalties lie. Then decide if the relationship is in your best interest; if it were us, we would be running for the exits here.

Fee-Based Advisors

In our opinion, “fee-based” advisors can be just as bad, if not worse, than purely commission-based brokers in terms of the conflicts that exist between the interests of the adviser versus those of the client. We have found that commission-based compensation is sometimes presented as “fee-based” compensation, which is a particularly evil label when used to refer to compensation based on both fees and commissions. In this sense, fee-based advisors have the ability to charge a percentage “based” on the assets they manage, but they may also have the ability to sell you a commission-based product (like an annuity, a load fund or life insurance). “Double dipping”, as it’s known in the industry, while not illegal, we feel is certainly immoral. The broker makes money from both the client and the commission on the product sold. What a guy! Don’t be fooled. We think it’s wise to stay away from advisors peddling investments that charge you front end or back end loads or surrender charges.

Fee-Only Advisors

Fee-only compensation (not to be confused with fee-based) is based on the value of assets managed for the client, not commission driven; in this type of fee structure arrangement, financial advice is generally the only product offered by the firm, and the advisor sits on the same side of the table with the client. The only way the advisor can make more money on your relationship, is to make more money for you.

Federal and state law requires that Registered Investment Advisors are held to a Fiduciary Standard. This principle requires that an advisor act solely in the best interest of the client, even if that interest is in conflict with the advisor’s financial interest. This includes seeking the best investment alternatives with the lowest internal expenses, and one of the best ways of enhancing returns is to control portfolio costs. Investment Advisors must disclose any conflict, or potential conflict, to the client prior to and throughout a business engagement. Investment Advisors registered with the SEC and various states must adopt a Code of Ethics and all Registered Investment Advisors must fully disclose how they are compensated.

High net worth, high income households can be targets for bad advice. When hiring an advisor, a considerable amount of thought and research should be dedicated to the process. After all, it’s only your money. Here are some things you should ask when engaging a financial professional:

• How are you paid?
• Are your recommendations in any way influenced by compensation?
• What is your investment philosophy?
• Do you have a clean regulatory record?
• How much experience do you have?

Finally, you should also request and review the advisor’s written disclosure statement, Form ADV Part I and II.

Other Considerations

Unlike other professions like accounting or law, the financial industry does not have one standard designation or brand (think CPA and Esquire or J.D.) Instead we have a wide array to choose from. Most financial professionals would agree that the CFP® designation offers a robust, well rounded financial education for financial practitioners and it carries much clout. It encompasses multiple areas of study which include taxation, retirement planning, insurance planning, estate planning, investment planning and case studies. Yet, this does not imply that every CFP® has the same investment philosophy or standard of care in dealing with clients. In fact, the CFP® designation can be held by advisors operating in two very distinct worlds: 1) the traditional brokerage firms/trust companies that may charge commissions or peddle proprietary funds and 2) the fee-only (or fee-based) side of the industry.

In summary, we advocate that a consumer should demand that their advisor sign on as a fiduciary in writing. In our experience, stockbrokers and Registered Representatives (RR) generally do not or will not do this. Conversely, an advisory representative at a Registered Investment Advisor (RIA) is always a fiduciary, and should have no problem signing a fiduciary oath for his client. But, remember that where a representative of an RIA is also an RR, the investor must clearly understand in what capacity the individual is acting, because depending on the context, the individual may not be operating as a fiduciary when giving certain advice. Remember that credentials do not always translate into your success. Bottom line—do your homework before you hire!

Why I Recently Left a Major Wirehouse and Why You Should Care!

The consolidation that has taken place within the financial services industry has resulted in a dilution of brand equity and a manic free-for-all by institutions. Banks are gaining brokerage capabilities and vice versa. In the rush to capture market share, many Investment Advisors are focusing on additional estate planning issues, and losing focus of their main objective, to provide sound financial advice. After nine years of working at Smith Barney - Citi Family Office, my company was guilty of just that, trying to be all things to all people, consequently diminishing the overall client experience.

That being said, I have recently left that company to pursue a career with a firm that exclusively provides investment counsel to high net worth clients. Having only one objective, managing client investment portfolios, allows us to concentrate solely on that one objective. What a concept! At L&S Advisors, we do not sell any products, nor are we constrained to any single strategy. Further, we do not hire third party or mutual fund managers to make our investment decisions, thus allowing our clients direct access to the fiduciaries guiding their portfolios.

The strengths of our core philosophy distinguish L&S Advisors from other providers. We adhere to an investment philosophy that ultimately manages risk by allowing flexibility towards the components of the securities markets in which we invest. As a result we can excel in a variety of market conditions, such as the turbulent times we are currently experiencing.

Simply put, if you are troubled with the investment advice or performance you are receiving, or don’t believe your risk management concerns are properly being addressed, I encourage you to send me an email so I can give you a brief introduction to how we may help with your financial challenges. I am confident after a few minutes, you will clearly be able to distinguish our investment philosophy and strategy from other providers, and how it has helped to contribute to our superior risk management and investment performance across several different market cycles in the past.







Past performance is no guarantee of future results. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities, markets or issues mentioned. The information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice