Seriously, What Is Your Best Interest?

31641471 - people talking with speech bubbles comparing interest rates and numbers as percentages Susan Roman and I have written a couple of articles that mention a recently promulgated rule from the Department of Labor. That rule imposes a fiduciary standard on all advisors who are getting paid to provide investment guidance on retirement accounts (401(k)s, IRAs, Roth IRAs, Simple IRAs, SEP IRAs, et cetera). For many folks this may be a game-changer for them since, previously, that fiduciary standard was imposed only on financial advisors licensed as Investment Advisor Representatives or who deal with employer-sponsored plans covered under the federal statute ERISA.
Once the new rule becomes effective and is implemented, all advisors must act in the best interests of their clients if they are offering investment advice on any kind of retirement account. Of course, wouldn’t you think that should have always been the requirement? As a result, we have had a lot of people come to our office asking questions about their current investment plan and whether their advisor is doing what is best for them.
And, believe me, I’m not the only one seeing these questions being raised. A few weeks back, I was in Dallas to give advisor training to a large group of Investment Advisor Representatives from across this country. Just about all of them came up to me to say that they have been fielding the same questions.
I guess hearing that your advisor has not been obligated to work in your best interest in the past can cause people to wonder if their financial professional has, in fact, been doing the right thing. We do remind people that just because some professionals have not been required to act in their clients’ best interest does not mean that they have not been doing their best for their clients. Nevertheless, many people, understandably, are choosing to examine their options sooner rather than later. These meetings can be very valuable for an investor, especially if he or she is in or approaching retirement, a time when a lack of vigilance and care can do significant damage to a person’s financial future.
But these questions do not have easy answers. If you are considering an evaluation of your current strategy, let me offer some suggestions on what you should do to prepare.
First of all, make sure you review all of your relevant financial documents. You need to provide the advisor with a snapshot of your current financial situation. What assets do you have? Where are those assets held? What are they invested in? What is the purpose of them? Do you have qualified or non-qualified accounts? What are your current sources of income? What are your total current expenses? What debt do you hold?
Look, think of it this way: if your friend asks for directions to a restaurant, the first question you ask is, “Where are you now?” The same goes for financial advisors; they need to know where you are starting from before they can start mapping out the direction you want to go.
You also want to have an idea of what your future needs will be. What are your estimated future expenses? How will your current expenses potentially change when you retire? What are your future sources of income? Do you have insurance in case the unimaginable happens? What if you die at a young age and you still have minor children or your spouse has a mortgage to pay? Have you provided for them? What if you become incapacitated? Are you prepared for that?
In our office, we find it helpful for people to bring their latest brokerage statements, retirement account statements (IRA, 401(k), TSA, 403(b), et cetera), life insurance policies, estate documents, and annuity policies. We also ask people to bring a copy of last year’s Federal Income Tax return.
So, how do you know if you are on the right path? If your advisor is doing what is best for you? One way to answer this is to perform a comparison of the past performance of your current strategies to the past performance of other available strategies. This is the best way to get an indication of what may happen going forward.
Many investors believe that everybody lost 50 percent in 2008, and that no one is insulated from catastrophic losses. This isn’t true, and the best way to illustrate that is to compare your strategy to other strategies and to have it back-tested during negative years to see where you stand. While no one can predict the future, we can learn from the past.
It’s something all of the advisors in all of our offices do, as well as the top financial advisors around this country. That way, you can look at how your portfolio behaved in the last full market cycle compared to how your portfolio may have behaved, had you been using strategy A, or strategy B, or strategy C, and so on. This is the easiest way to compare your strategy to other strategy options available to you, rather than just comparing it to the markets.
Now, you may have noticed that I referred to strategy A, B, C, et cetera. This is intentional. I want you all to understand that there are multiple strategies that investors can find success with. An advisor’s role is to help find the most appropriate one for the client.
Remember, the reason many investors are going to financial professionals for a second opinion is because they fear their portfolios might not be designed in their best interest. There is no way to determine whether or not it is, if the relevant questions are not answered.
At least now you will know the relevant questions to ask.
I hope this helps. Have a great week.
And remember, be vigilant and stay alert, because you deserve what’s in your best interest.