THE BLOG
08/21/2013 11:57 am ET Updated Oct 21, 2013

Intelligent Investor Series: Six Essential Questions to Ask Your Money Manager

Intelligent Investor Series #3

In order to change the game, it's essential to be clear on the rules. Yet, it seems in modern-day gentlemen's agreements, implicit adherence to "the rules of the game" has fallen by the wayside. Growing up, before becoming a professional investor, I (Steven) boxed. Before regular bouts in the ring, and intermittently in boyhood street fights, the first rule of fighting was not to agree to the other guy's rules, because, the minute I did, I'd likely find myself on the mat -- subjected to that which my opponent and I had agreed not to violate. As a society, we are less and less surprised when the agreed-upon rules are not only violated, but, we find out the perpetrator's pleas of innocence were lies the whole time. Lance Armstrong, Alex Rodriguez, and the fall from grace of other sports legends while disappointing are now less surprising.

Disturbingly, as a culture we are becoming used to major players in our economy functioning in much the same way: knowing the rules, ignoring them while presenting a good face to the public, and getting away with A Big Lie. And while Alex Rodriguez's descent may at first glance seem to affect him the most (in addition to the staff he employs, not to mention his fans), there is a bigger issue at work.

Not everyone is focusing on the original problem -- he broke the rules, and, there are supposed to be clear consequences when you break the agreed-upon rules. Unless you are, as one publication called HSBC, "Too Big to Jail." Or your institution is awash in scandal. Or, you were among the 15 brokerage firms being investigated about the way high risk, esoteric products were marketed and sold to senior citizens.

Does anyone follow the rules anymore?

According to Patrick McDevitt, "... In tumultuous times like these, working with a trusted broker can be a source of comfort and peace of mind." Or at least it's supposed to be. Unfortunately, there may be issues that a stock broker, who is not formally obliged to hold fiduciary responsibility, meaning act in your best interest at all times, keeps from unsuspecting investors.

What are the keys to determining if a financial professional is working for you? Start with these six questions. The answers may be surprising.

1. Are you legally obligated to disclose all of the fees I will pay -- including fees built into products I won't see on my balance sheet?

Disclosures on purchasing forms are usually in small type buried several pages into an agreement. Know what you're purchasing and how much you are paying. For example, if, you purchase a wrap account, and, own a variety of mutual funds and other investments are "wrapped" together, the account may be subject to an annual percentage fee. Knowing precisely how fees are built into products can inform your purchasing decision.

2. Will you always provide the best investment at the lowest fees for my family?

It's a yes or no question every investor could ask; most do not! Commissions and fees are a key motivator for a commission sales rep, and, selling what's best for the client's bottom line may not be best for the broker's -- this is why clear, pointed questions are a must.

3. What qualifies you to be a money manager?

Pay close attention to the answer. Impressive-sounding titles, registrations, and passing examinations may not mean very much. This is where further skullduggery is needed to assess the overall experience of the manager.

4. Can you produce an audited track record?

Simply put, a traditional broker is a salesperson; he or she will not have an audited track record since s/he is not a professional investor. Only professional investors with years of experience will be able to produce this; a salesperson will not.

5. How long have you been with your current employer?

Invariably people change jobs more and more. However, if there are too many employers, it could be a red flag as job jumping could mean a broker is hiding something. FINRA and the SEC have included sections on their websites to assist investors who are completing due diligence on financial professionals they may engage.

6. Who do you work for?

If a financial adviser works only for you, s/he will sign a fiduciary oath. If any money manager working for you and your family does not sign a fiduciary oath, that person is not working for you and your family and dissolving the relationship should be considered. Here it's vital to pay attention: Does the person work for him/herself, or, for a firm? Are there financial obligations to be met for the firm? Most brokers are held to a "suitability standard," rather than the fiduciary standard. Those held to the latter are legally obligated to offer clients the recommendations in the clients' best interests only -- even if they don't match the financial interests of the broker. If two products are both "suitable", it's likely anyone not bound to the fiduciary standard will promote the product offerings paying the highest commissions with the highest fees. In this case, the broker's first obligation is to her/himself.

While following a suitability standard instead of fiduciary standard may be within the scope of the law, wouldn't it be better to work with people, who are, unquestioningly, working to serve your interests and not sell you products or make money off the transactions in your accounts?

Wealthy families have been bypassing brokers who don't work in their interests for decades; they play the set of rules which best suits them. Want to know more about them? Check out the secrets of wealthy families and send us your questions.

The information contained in this blog is provided solely for convenience purposes only and all users thereof should be guided accordingly. The Abernathy Group II does not hold itself out as a legal or tax adviser. If you wish to receive a legal opinion or tax advice on the matter(s) in this report please contact our offices and we will refer you to an appropriate legal practitioner.