Finding a good financial planner can be tricky in the absence of a fiduciary rule requiring investment advisors to act in your best interest — not their own — when dealing with retirement investments.
But that doesn’t mean good planners aren’t out there. In this article, we’ll tell you how to separate the good ones from the bad ones.
Be Sure to Do Your Homework Before Hiring a Financial Planner
According to Barron’s magazine, some $17 billion is lost in retirement savings every year simply because dishonest financial advisors steer their clients toward investments that meet general suitability requirements but aren’t in the best interests of their client base.
Why? These investments pad the advisor’s pocket with fat commissions.
So now more than ever — in the absence of an official fiduciary rule requiring advisors to put their clients’ interest above their own — you have to be sure your advisor clearly discloses any conflicts of interest upfront before you agree to do business with them.
That’s where Form ADV comes into play…
Form ADV Part 2A: Understanding the Disclosure Brochure
Every registered investment advisory (RIA) firm is required by the U.S. Securities and Exchange Commission (SEC) to file an ADV Part 2A.
Form ADV is a standardized template that investment advisors use to register with the SEC at the federal level, as well as with local securities authorities.
Part 2A of the ADV mandates that RIAs must produce those little brochures that disclose the following information in plain English for anyone to see:
- Business practices
- Conflicts of interest
- Disciplinary information
The brochures are then given to prospective clients and are also made publicly available in a searchable database. Existing clients will get an annual copy, as well as updates whenever material changes are made to the document.
“As a fiduciary, you also must seek to avoid conflicts of interest with your clients, and, at a minimum, make full disclosure of all material conflicts of interest between you and your clients that could affect the advisory relationship,” the document reads.
“This obligation requires that you provide the client with sufficiently specific facts so that the client is able to understand the conflicts of interest you have and the business practices in which you engage, and can give informed consent to such conflicts or practices or reject them.”
While that may sound very reassuring, it’s not enough for the modern investor. Today, the best financial advisors will often seek to distinguish themselves by going a step beyond…
Make Sure Your Financial Planner Has a Code of Ethics
You should look for additional assurance as part of a Form ADV Part 2A disclosure when you’re considering hiring a fee-only financial planner.
For example, Capital Investment Advisors (CIA), an Atlanta-based RIA firm, has taken the additional step of including a Code of Ethics in its Form ADV.
Among other things, the CIA Code of Ethics says the following:
“CIA and its associated persons will not put their interests before your interest. CIA and its associated persons may not trade [securities] in such a way to intentionally obtain a better price for themselves than for you or other clients.”
Language like this gives additional binding assurance that this RIA will always put your best financial interests first, not theirs.
TIP: Any RIA you’re considering doing business with should have similar language in their ADV Part 2A as well. Request a copy of their Form ADV Parts 2A and 2B (aka disclosure brochure) and review their Code of Ethics policy thoroughly before hiring them.
Why is it necessary to do all this homework before hiring a financial planner? Wes Moss, Chief Investment Strategist at Capital Investment Advisors, explains it this way to Clark.com:
“When working with a financial advisor, you want to be sure you’re partnering with someone who will keep your best interests in mind when making decisions on your behalf. Investment advisors have an obligation to act in the client’s best interest when making decisions regardless of how it might impact the advisor or their firm. That’s something that isn’t guaranteed by people in this industry who are not held to a fiduciary standard.”
Whenever you’re hiring a financial planner, you want to be sure that they act as a fiduciary. That is, you want to be sure that they’ll put your best interests ahead of their own interests.
One of the best ways to do that is to inspect their Form ADV, paying particular attention to Part 2A. Additionally, you want to see a Code of Ethics or something similar in their ADV.
Just ask them to provide you their Form ADV during your first meeting. If they refuse, that’s likely a sign you should take your business and your hard-earned money elsewhere.
Meanwhile, if you have additional investing questions, you may want to consider reaching out to our Consumer Action Center.
While we can’t currently accept phone calls to our Consumer Action Center helpline, we can still answer your money questions! Visit clark.com/cac to submit your question and a Consumer Action Center volunteer will call you as soon as possible.