How do you know to trust your financial adviser?
Reprinted courtesy of MarketWatch.com.
To read the original article click here.
How do I know if my broker or adviser or banker is telling me the truth?
The answer: You can’t ever know with total certainty. But you can call on one of two conclusions that psychologists have come to when they have thoroughly studied the topic of lying.
First, they say that in various ways we are all liars. We lie to each other (little white lies, to cite one common example) and to ourselves in numerous ways that seem to protect our concepts of who we are.
How do we apply these to our adviser?
To illustrate my point, I’ll use just one important issue. The answer to the following question could make a huge difference in your financial future.
Is your adviser making recommendations based on everything he (or she) knows that is likely to get you to your goals? Or are those recommendations based on what the adviser is being pressured to sell at the moment?
If you ask that question directly, your adviser will almost certainly tell you his (or her) advice is in your best interests.
Point 1 from above: Everybody lies.
Point 2 from above: People are less likely to lie when they have specifically agreed not to.
Takeaway: Get a “truth commitment” in writing.
Here’s a powerful reason this makes sense: If a professional makes a promise in writing, that promise holds the power of a contract, a contract enforceable under the law. Because of that, Wall Street and the banking industry are very reluctant to put promises in writing.
While a written promise doesn’t guarantee you anything, it makes you more likely to get the very best help from your adviser, broker or banker.
What to do
You may be wondering what sort of written promise would lead to this result, and I’ll give you an example that in many ways is a model of what you should expect – and get – from an investment professional.
This is called a fiduciary pledge. “Fiduciary” is a big word with a simple meaning that you should know. A fiduciary is someone who is legally obligated to always put a client’s interests ahead of his or her own interests.
At www.fiduciarypledge.com, you’ll learn that a fiduciary is bound to always act “with undivided loyalty, good faith and due care.” I’ll show you a sample “fiduciary pledge” below, and you can download it for yourself at the web site above.
(That web site, which also contains more useful information, was created by Jeff Kuest, founder and managing principal of a financial advisery firm in suburban Portland, Oregon.)
As you will see, the following fiduciary pledge calls for full, transparent disclosure of all financial facts and conflicts of interest, whether real or potential.
I, the undersigned, ___________________________ (“financial advisor”), pledge to always put the best interests of ________________________________ (“client”) first, no matter what.
- As such, I will disclose in writing the following material facts and any conflicts of interest (actual and/or perceived) that may arise in our business relationship:
- All commissions, fees, loads, and expenses, in advance, that client will pay as a result of my advice and recommendations;
- All commissions I receive as a result of my advice and recommendations;
- The maximum fee discount allowed by my firm and the largest fee discount I give to other customers;
- The fee discount that client is receiving;
- Any recruitment bonuses and other recruitment compensation I have or will receive from my firm;
- Any fees I paid to others for the referral of client to me;
- Any fees I have received or will receive for referring client to any third parties;
- Any other financial conflicts of interest that could reasonably compromise the impartiality of my advice and recommendations.
Adviser: _____________________________________ Date: _____________________
This is the best set of such promises that I’m aware of. Every item is worth discussing with your adviser, broker or banker. You deserve the answer to every item mentioned, and you should discuss each one with your adviser, broker or banker.
One of the best things you as an investor can do is to print that pledge and use it as the basis of a serious discussion with your adviser. Ask him to talk about each item. Ask him to sign the pledge or something similar.
If he won’t do so, I suggest you find an adviser who will.
For a more detailed look at the most important decisions that investors make, check out my free video, “Financial Fitness Forever: 5 Steps to More Money, Less Risk and More Peace of Mind,” which you’ll find at the top of the home page of my web site.
Richard Buck contributed to this article.