Base Your Advisor Decision on the Facts

Physician's Money Digest, June15 2003, Volume 10, Issue 11

In these times of accountingfraud, insider trading, a plummetingstock market, and a softeconomy, nervous consumers whoare searching for solid financial footingare increasingly turning to financialplanners for help. This effort tofind solid financial footing, however,can be a tricky endeavor for someinvestors. For example, how do youknow you're hiring a genuine financialplanner and not someone usingfinancial planning merely as a ployfor selling financial products?

Unfortunately, you can't alwaystell. It requires effort on your partto find out if the financial planneryou're considering is trustworthy.Trust is the foundation on which afinancial planning relationship isbuilt. You will be revealing one ofthe most intimate aspects of yourlife: money. Therefore, you need toknow that your financial planner islooking out first and foremost foryour interests, and not theirs. Thestarting point for building that trustis full disclosure by the planner.


In your initial contact with aprospective financial planner, you'llprobably focus on many issues: howmuch they charge, what servicesthey provide, what financial planningcredentials they have, and howthey can help you. Among the manyquestions you should ask yourpotential financial planner duringyour initial visit is 1 you may notknow to ask: Are you a registeredinvestment advisor (RIA) and, ifnot, are you a Certified FinancialPlanner™(CFP®) practitioner?

Why is the answer to this questionso important? All RIAs mustprovide full disclosure about theirbusiness practices. An individual orfirm must register with either thefederal SEC or their state securitiesagency as an RIA, if they provideinvestment advice as part of theirbusiness. Certified Financial Planner™practitioners are also requiredto disclose generally the same informationas an RIA.


Financial advisors who work forbanks or as insurance agents orstockbrokers do not have disclosurerequirements, unless they are alsoCertified Financial Planner™practitioners.The law currently exemptsstockbrokers from registering asadvisors if their investment advice is"solely incidental"to their brokerageservices and if they are notspecifically compensated for thatinvestment advice. The only timethis registration exemption doesn'tapply is when a stockbroker has thepower of attorney to buy and sellstocks in a client's account.

This registration requirementmay soon change if the SEC's latestrecommendation regardingstockbroker exemptions passes.They are proposing that stockbrokersremain exempt even if theirclient is paying for the investmentadvice, such as through portfoliomanagement fees. Stockbrokerscalling themselves financial plannerswho provide investment advicefor a fee need to register.


When it comes to providing fulldisclosure, an RIA can provide youwith this information in a copy oftheir Federal Form ADV, Part II,which covers numerous items (eg,the RIA's services and fees, types ofclients, education background, businessactivities, and business affiliations),or in a customized brochure.You can request this brochure fromyour potential advisor. In additionto both of these sources, you canalso find information in the FederalForm ADV, Part I, which reveals anydisciplinary history.

What key disclosures must anRIA make when registering? RIAsmust disclose whether they buy orsell securities that they recommendto clients (ie, self-dealing), howthey are compensated for their services,whether they are compensatedby a third party for client referrals,and what other business arrangementsthey have with outsideparties. Some of these arrangements(or other arrangements) maysuggest potential conflicts of interestthat might compromise theobjectivity of the advice.

Why are these disclosures helpfulto consumers? While not all con-flicts of interest are inherently bad,not knowing they exist can be adetriment. The key is full disclosureof those potential conflicts, so thatconsumers can judge for themselveswhether the conflicts could potentiallycompromise the planner'sobjectivity and undermine theirclient's trust. However, unless theplanner is an RIA or a CertifiedFinancial Planner™practitioner, it'sdifficult to find out whether suchconflicts exist.


Something you may not beaware of is that when you hire anRIA, it is their responsibility andduty to act as a fiduciary. What doesthis mean? It means that the advisormust put your interests (ie, theinterests of the client) ahead of theirown interests. Financial plannerswho are not registered or who donot work in a bank or trust departmentare not required by law toadhere to this high standard. Inaddition, RIAs are also not permittedto use client testimonials to helpattract new clients.

Knowing the facts is alwaysimportant, especially when it comesto making an important decision likechoosing an RIA. Again, this is theperson who will be handling one ofthe most important aspects of yourlife (ie, your hard-earned money).Therefore, before you decide on anRIA, make sure you do some investigating.When you meet with potentialRIAs, request a copy of their FederalForm ADV, Part I and Part II, or abrochure. The information includedwill help you decide whether this personis the right RIA for you andwhether you can build a trusting relationshipwith them.

This column is produced by the Financial

Planning Association (, the

membership organization for the financial

planning community.