Sometimes in life it's important to get some help. Of course with help comes added costs. Hopefully the added costs get offset from added benefit. In the world of finance and personal investing there isn't a shortage of "helpers." We've got financial advisors, brokers, wealth manages, fiduciaries, registered representatives, etc. It can all get a bit confusing. In this blog post I hope to simplify the topic a little bit. I'll mainly focus on Brokers and Fiduciaries as those are really the two main roads to go down in terms of hiring help.
Brokers can usually get a bad rap for being overly aggressive and in it for their own gain. If you watched Wolf of Wallstreet you'll know exactly what I'm talking about. Although there can be a conflict of interest when working with a broker, I've heard of some people having great relationships and successful investing partnerships with their brokers. So it all depends, but brokers do ultimately serve two masters. One being the firm they work for and the other the client. Ultimately when push comes to shove, more times than not the firm wins out. Brokers don't necessarily have to provide their clients with the best investment vehicles that are best suited for their goals. All brokers have to provide is something that is "suitable." What's suitable? What the hell does that mean? It could mean whatever they want it to. Legally it's all a broker has to provide. The system is designed to reward them for selling, not for providing the best advice to their clients. Again the master of the firm wins out in the end.
Brokers may not be invested in any of the assets that they sell you. Fund managers may not be invested in the mutual funds that they are selling! It's because they don't need to be AND they get rewarded for selling the product, not for using it. Would you trust a chef that doesn't eat his own cooking? Most likely not. Whether you make money or not in the market, the broker is making money either way. Every time they make trades on your behalf they get paid. They assume no risk, since they don't put any of their own money into the market, and yet they still get paid. Now, as I have said before, there are folks out there who have great, successful relationships with their brokers, but you can see how the system itself is built for the broker to win out. As Matthew McConaughey says in Wolf of Wall Street, "Move the money from your client's pocket into your pocket."
Fiduciaries are a different breed of helpers. They are bound by law to give their clients conflict free advice. They have abandoned the big firms and have gone out on their own into the wild of the financial world. They are not tied to any particular products, services, or companies. They are only tied to their clients. Bounded by law, they must be free of any conflicts of interest. As a result, they have the clients financial well being in mind since it directly ties into their paycheck. For their services, the client has to pay an annual fee of up to 1%. You shouldn't really pay more and in some cases the fee is tax deductible, unlike brokerage fees.
Now of course, it's important to find the right fiduciary for you and you may have to interview and research a few before you find the right one. It's essentially like dating. There's a market filled with potential prospects and it will take some time before you find the right fit. It's worth the effort, however, because sound advice that doesn't cost an arm and a leg will help us in the long run. So, we want to look for Registered Investment Advisor (RIA for short). Make sure you ask them if they are fiduciaries because not all financial advisors are. There are over 200 designations allotted to money managers and advisors. WE WANT A LEGALLY BOUND FIDUCIARY. We don't want window dressing or people posing. They have to have some kind of legal documentation stating that they are a fiduciary. Below is a bullet point reference guide of things to look out for:
1. Make sure the advisor is registered with the State and SEC as an RIA.
2. Make sure they are compensated on a fee equal to a percentage of your assets. Make sure it's the only fee and there are no added/hidden fees
3. Make sure your RIA does not receive any compensation for selling any particular investment vehicles
4. You don't want to give them money directly to manage. You want to set up a third part account that they have access to i.e E*Trade, Fidelity, Vanguard. This way monthly account statements come directly to YOU and can't be tampered with.
Hiring help and delegating some of the work is an important thing to do in life. But, it's important to have some general understanding of the service your looking for. In order to do that we must continue to upgrade our financial literacy. We don't need to be masters of any particular area, but when we at least have a general understanding of the topic, we can have more nuanced conversations with the people we hire to help us. And we are less likely to get ripped off.
I hope this was helpful. I have attached below a picture I put up on IG showing a breakdown comparing Brokers and Fiduciaries--a go to chart if you will. If you aren't following me already please do @thelaymaninvestor. That's it for now and happy investing!