Don’t Let Just Anyone Handle Your Money: Use Caution When Choosing a Financial Adviser

African Americans may do well to check out a financial adviser’s credentials thoroughly before hiring one to manage their investments. New data shows what you need to know before choosing a financial adviser.

Some 48% of Americans mistakenly believe all financial advisers are required by law to always act in their clients’ best interest, a new survey by digital wealth manager Personal Capital shows. The finding comes after the Securities and Exchange Commission this month settled charges against 79 investment advisers who must return over $125 million to clients tied to mutual fund sales, with a large chunk of the money going to retail investors, DI Media reports.

The Personal Capital 2019 Financial Trust Report further disclosed that 65% of investors who work with a financial adviser incorrectly believe that financial advisers only make recommendations that are in a client’s best interest, a rise from 46% in 2017.

A startling discovery was that just 44% of Americans know the fee amounts they pay on all their investment accounts. And 20% do not know how their adviser is paid. Personal Capital claims hidden fees can add up to more than an eye-popping $400,000 in an investor’s lifetime.

This report stemmed from a CARAVAN survey by Engine among a sample of 2,007 adults—1,004 men and 1,003 women—18 years of age and older. The online interviews were conducted in December 2018 and entailed responses from 202 African Americans.

Though 30% surveyed think a financial adviser is likely to take advantage of a consumer, 97% trust that their own financial adviser will act in their best interests.

A Lack of Awareness When Choosing a Financial Adviser

Accentuating the lack of awareness pertaining to advisers’ legal obligations to clients, 18% were unable to identify if their adviser is a broker/dealer or a fiduciary. The 26% who indicated their advisers are broker/dealers should reconsider if they are receiving unbiased financial advice, Personal Capital says.

Questioned about who they would trust their money with, 28% said a registered investment adviser, 21% a big bank/brokerage firm, 14% a local advisory company, 8% an online platform. Thirty-three of the respondents said none of the above.

On the loyalty front, millennials surprisingly were the most devoted with 80% declaring they would follow an adviser to a new firm. Seventy percent of Gen Xers and 66% of baby boomers felt that way. Respondents reflected on the usefulness of technology in financial services and cybersecurity concerns.

The overall findings come after years of public debate among regulatory bodies over the fate of the fiduciary rule focused on arguing the definition of “best interest,” which Personal Capital claims may be contributing to the increased public confusion.

“While we hope all financial services professionals and firms are working with Americans’ best interests in mind regardless of fiduciary designations, this simply isn’t the case,” said Jay Shah, CEO of Personal Capital. “When it comes to wealth management, anything less than advice that meets the fiduciary standard simply isn’t acceptable. Investors deserve more.”

How to Find a Reputable Adviser

Responding to the Personal Capital report, Kevin Mayeux, CEO of the National Association of Insurance and Financial Advisors, said, “Broker-dealers and their registered representatives provide affordable, trustworthy financial services and products to clients at all income levels, from the wealthy to those with more modest means.” The NAIFA is the nation’s largest membership association of insurance and financial professionals.

Mayeux added,  “Fiduciary regulations, such as one imposed by the U.S. Department of Labor before it was struck down by a federal court, can create burdensome and costly requirements that make it difficult or impossible for advisers to provide individualized, human-on-human advice and services to middle- and lower-income consumers. Many registered investment advisers charge fees and require account minimums of $200,000 to $1 million or more while relegating people who cannot maintain those balances or afford those fees to one-size-fits-all computerized models or call-centers.”

“The truth is, insurance and financial advisers are highly-trained and licensed professionals. They are governed by state and federal securities laws, and every securities transaction they complete with a client is subject to compliance reviews by their broker-dealers and the Financial Industry Regulatory Authority.”

Mayeux pointed out NAIFA members agree to abide by a code of ethics that includes a promise to promote their clients’ interests. He says the vast majority of these advisers build and maintain enduring relationships with clients that often last decades and would not be possible if the advisers were not looking out for the best interests of their clients.

“Nonetheless, NAIFA supports an ongoing effort by the Securities and Exchange Commission that would further require advisers to serve in the best interests of their clients and is working with the SEC to ensure that the final rule benefits consumers of all income levels and allows them to continue to receive needed services and advice.”

A “Staunch Advocate”

Geoffrey Brown, CEO of the National Association of Personal Financial Advisors, said the findings from Personal Capital’s 2019 Financial Trust Report are not surprising. He said because of efforts to mislead and confuse the public by non-fiduciary financial services professionals, consumers often don’t have the clarity needed to evaluate the relationship they have with their chosen professional.

He added this leads to a lack of understanding about the true cost of the engagement and the duties owed to the client under the law. Since its inception, Brown claims NAPFA has been a staunch advocate for fiduciary principles, something he maintains is the most transparent way of serving the public. The NAPFA calls itself the country’s leading professional association of fee-only financial advisers.

“In today’s marketplace, it’s virtually impossible to distinguish a salesperson from an adviser, or between those advisers who are legally obligated to provide advice under a fiduciary standard versus those who are not. When working with an adviser or salesperson, consumers need to be clear about the nature of the relationship,” Brown says.