Whose Interests Are Being Served? Critical Questions for Evaluating Advisers

If you compare the marketing from different wealth management firms, it can be easy to believe that they are all about the same. However there are significant differences in compensation and revenue models that can greatly influence the advice you receive. It is crucial for investors to ask questions that surface potential conflicts of interests and ensure that the person giving you advice is not influenced by any other factors beyond your personal financial goals.

As a starting point, learn about the legal responsibility or “standard of care” that different advisers have to their clients. Firms providing investment advice are either held to a “suitability” standard or a “fiduciary” standard. Under the suitability standard of care that typically applies to brokers and insurance agents, the adviser can promote an investment recommendation as long as it suits a client’s needs. Depending on the circumstances, a broker is permitted to recommend products and services that generate the best commissions and is generally not obligated to put the client’s needs ahead of their own or their employer’s financial benefit.

By comparison, a fiduciary standard of care mandates that an adviser put the interest of the client ahead of their own when making an investment recommendation. The adviser must also disclose material potential conflicts of interest in their recommendations as well as clarify all sources of compensation in serving a client account.

So how do you determine if your adviser is putting your interest first?

Ask, “Which standard of care are you legally held to and are you serving me as a fiduciary?”

The answer should be straightforward. You can clarify by also asking, “Are there any times or circumstances when you are not acting as a fiduciary?”

Second, ask a series of questions to find out when and how the adviser makes money on your account:
  • Can you tell me all the different ways you and the firm are paid servicing my account?
  • What other fee sources and forms of compensation do you and the firm receive beyond direct client advisory fees? (manager commissions, fee shares, referral commissions, soft-dollar arrangements)
  • Do you or the firm share fee revenues with any third parties such as investment managers or insurance providers?
  • Does your firm have proprietary products?
  • Is your commission for placing clients in proprietary products higher than or different from non-proprietary products?
  • Are you or your department incentivized in any way (monetarily, management expectations or tracking) for the use of proprietary products within client accounts versus non-proprietary products?
  • Do you receive fees based on transactions in an account?
  • Are you paid a bonus or do you have any special compensation arrangements for placing clients in specific funds and products?

The goal of these questions is to surface all revenue sources and triggers to determine if that person’s investment advice is compromised. Again, these are straightforward questions that should have straightforward answers. If the answers require an adviser to make a call to compliance or you to read through pages of fine-print documents, those are red flags.

To properly evaluate any adviser, you have to investigate beyond their marketing materials and get to the core issues of client obligation and compensation. These will shed light on how and if their investment advice could be influenced by other factors. Your adviser should be exclusively motivated to serve your best interests and have no other competing sources of revenue. Ultimately, the responsibility for ensuring this still falls to the investor.

The material shown is for informational purposes only and should not be construed as accounting, legal, or tax advice. Altair Advisers LLC is a registered investment adviser with the Securities and Exchange Commission; registration does not imply a certain level of skill or training. While efforts are made to ensure information contained herein is accurate, Altair Advisers cannot guarantee the accuracy of all such information presented. All registered investment advisors are subject to the same fiduciary duties as Altair Advisers. Please see Altair Advisers’ Form ADV Part 2A at https://adviserinfo.sec.gov/ for additional information about Altair Advisers’ business practices and conflicts identified.