Whom Can You Trust?

June 10, 2009

Whom can you trust to give you unbiased investment advice, free of compensation-related conflicts of interest?

When physicians are seeking investment advice from an unbiased source, whom should they turn to?

Not Wall Street brokers!

Many leading Wall Street firms have been fined for giving clients tainted information concerning potential investments. The practice had been going on for years, often resulting in clients making bad decisions on where and when to invest based on information loaded with conflicts of interest.

Not some mutual funds!

Acknowledged abuses by some mutual funds have included promised discounts that failed to materialize, more tainted advice from brokers, and portfolio managers who preyed on their own funds.

So whom can you trust?

An independent financial advisor who:

… is compensated exclusively by professional fees.

… is a fiduciary, and must act only in your best interests.

… has the highest level of professional credentials.

… is independent of any financial product sales or distribution.

Some financial advisors claim that they are only paid a fee by the clients for their financial advice. That may be true concerning their securities advice, but what they don’t tell you is that they may earn additional compensation through a number other means such as:

● Commissions on insurance sales

● Finders fees for referrals to other professionals

● Free vacations as incentives for selling a particular product

● Bonuses for directing client investments to certain specific products

Fee-Only Compensation

Many of the problems on Wall Street and in the mutual fund industry come about as a result of the inherent conflicts. Conflicts of interest can occur when the firm that gives you investment advice is the same firm that makes money from operating and selling financial products. A better answer is to get investment advice from an advisor who is independent and does not make any profit from selling financial products.

And the best way to do that is to select an advisor compensated exclusively by professional fees. Fee-only advisors are in the business of selling advice, not products. For a list of fee-only advisors in your area contact the National Association of Personal Financial Advisors.

A Fiduciary Relationship

A fiduciary is defined "as a person who holds a position of trust or confidence with respect to someone else and who is therefore obliged to act solely for that person’s benefit." A fiduciary must put the interests of the people they service first. Physicians and attorneys are fiduciaries. Registered Investment Advisors (RIAs) are also fiduciaries, and are regulated by the U.S. Securities and Exchange Commission (SEC). Wall Street brokers are not fiduciaries. They are in the business of selling products, and are only regulated by their own industry association.

Importance of Credentials

As a physician, you are aware of the importance of dealing with a person who has the highest level of professional credentials. Within the investment advisor community there are a number of important credentials which you should look for, including the following:

● Chartered Financial Analyst (CFA®)

● Certified Financial Planner (CFP®)

● Chartered Financial Consultant (ChFC®)

● Chartered Life Underwriter (CLU®)

● Certified Investment Management Analyst (CIMA®)

● Accredited Investment Fiduciary (AIF®)

● Chartered Alternative Investment Analyst (CAIA®)

● Chartered Advisor for Senior Living (CASL™)

● Accredited Estate Planner (AEP)

● Enrolled Agent (EA)

Product Indifference

Since fee-only Registered Investment Advisors’ only compensation is from their professional fees, whether they recommend investment product A or product B will not affect their income. In fact, the only way a fee-only advisor can earn more income is by increasing the value of their clients’ portfolios, since their annual fee is usually based on a percentage of the total assets they manage. If their client’s portfolio decreases in value, they earn less. Conversely, brokers earn commissions whenever their clients buy or sell products, often earning bonuses or other additional compensation for pushing one particular investment over another. They earn income whether their clients’ portfolios gain value or lose value. Who do you think will give you more unbiased recommendations?

Finally, a physician should check out an advisor’s background to make sure there have been no charges or complaints filed against them. This can be done through the SEC’s website.

Tom Orecchio, CFA®, CFP®, CLU®, ChFC®, AIF®, is the president of Modera Wealth Management, which offers fee-only wealth management services.