Mullooly Asset Management

Fiduciary Fee-Only Financial Planner | Investment Advisor in Wall, NJ

financial adviser

Inside ETFs 2019

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I just got back from Hollywood, Florida where I spent the last few days at this year’s Inside ETFs conference.

It was a special trip for me because this was my first chance to participate in a panel discussion. I’m incredibly grateful to the people at Inside ETFs for giving me the opportunity. Big shout to John Swolfs and Sovaida Noronha, specifically.

I had the honor of being joined on stage by my good friend, Justin Castelli of RLS Wealth Management. Justin is doing great things with his practice out in Fishers, Indiana and has previously been a guest on Tim’s Living with Money podcast.

Inside ETFs 2019 Panel

Justin and I were joined by two other industry rockstars, Jennifer Wappaus and Malik Sarwar, to discuss how to effectively transfer wealth across generations at an advisory firm. We had the honor of being led in this discussion by the venerable Rick Ferri.

An overarching theme during our conversation was finding ways to engage entire families. As advisors, we need to get better at involving both spouses and the next generation during the financial planning process. Surviving spouses and children can and should walk out the door of an advisor who they never interact with until after their loved one is already gone.

Working with entire families can mean a lot of things. It can mean putting your message out on multiple platforms depending on who you’re trying to reach. It can mean having alternative client service models that enable you to work with individuals at different life stages. It can mean taking an active interest in causes or topics that different family members enjoy. My friend Justin summed it up best, saying that we should just treat all family members like human beings. It seems like a no-brainer, but our industry struggles with it none the less.

At Mullooly Asset, our family of advisors works with client households as a team because we feel that age diversity can be an important factor in serving entire families.

I wish we filmed the entire panel so you could hear Jennifer, Justin, Malik, and Rick say these things in their own words, which were far more polished than my writing. Fortunately, Justin and I did have some time on Sunday afternoon to film a quick video where we discussed some of these topics. You can check it out here:

Questions to Ask Before Working With a Financial Advisor

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There needs to be a discovery period between advisor and prospective client. It should be conducted almost as an interview. Both advisor and prospective client NEED to find out if the relationship will be a good match. Each situation will be different, but here are a few essential questions every prospective client should ask their potential financial advisor.

How are you compensated?

This is THE MOST IMPORTANT question to ask before beginning a relationship. A financial professional can receive compensation in many different ways and it can often be confusing for clients.

  • Fee-Only –The fee paid is usually based on assets under management (AUM). The advisor will charge a percentage fee on the amount of assets under his/her control. These types of professionals do not get compensation from any product sales. The ONLY form of compensation they can receive is from the fee.
  • Hourly Financial Planning Fee – Some advisors charge hourly fees based on the amount of time spent working on a particular client’s financial plan. This will be on a case by case basis.
  • Fee-Based –Not to be confused with fee-only, they are NOT the same thing even though they sound very similar. A fee-based financial advisor has the ability to charge a fee based on assets under management AND collect sales charges and commissions on the products they sell. Fee based financial advisors are usually what are known as “hybrid advisors”. This type of compensation structure has serious flaws to it. If the advisor is compensated for selling products, wouldn’t he/she pitch the product that pays the most? This type of compensation structure often leads to conflicts of interest between client and advisor.
  • Commission-An advisor that gets paid on commission gets a percentage of every transaction they execute for a client. Some of the commission goes directly to the advisor with the rest of it going to the firm. This type of compensation structure is loaded with conflicts of interest. The advisor will want to perform as many transactions as possible so they receive more money. Also in some cases, firms place minimum transaction requirements on their advisors. The firm forces their advisors to execute transactions in client accounts even if it is not in the client’s best interest.
  • Wrap-Fee – A wrap fee account is an all-inclusive compensation method. The advisor charges an assets under management fee and a set fee for all of the trading commission. A wrap-fee would make sense for someone that wants to do a lot of trading in his or her account. Therefore, in a sense there is a limit on the amount of commission the advisor can collect. However, the conflict of interest from receiving commission still exists.

Are you a fiduciary?

There are many different titles financial professionals call themselves (wealth managers, wealth consultants, financial advisors, financial planners etc…). None of these matter as much as whether that person is a fiduciary.

A fiduciary is required to put the client’s interests ahead of their own. Investment advisors are legally bound by the fiduciary standard. Under the fiduciary standard advisors must try to avoid conflicts of interest and disclose any conflicts that do arise. Advisors must use best execution practices when transacting client accounts. Best execution involves performing the transaction at the lowest cost and by the most efficient means possible. Fiduciaries’ loyalty reside with the client only.

A financial professional with any other title beside investment advisor or certified financial planner may not be required to act as a fiduciary. All other financial professionals will be acting under the suitability standard of care. The financial professional has to believe that the investments are suitable for the client. They do not have to act in the best of interest of their clients. As long as the recommendations of the financial advisor meet the objectives of the client, the suitability standard has been met. The disclosure of conflicts of interest are also less strict under the suitability standard. The financial professional’s loyalty is split between what is best for his/her firm and what is best for the client.

What is your investment strategy?

An advisor’s investment strategy should be one that can adapt to meet your objectives, time horizon and risk tolerance. An advisor should be as transparent as possible when explaining the strategy to you. If an advisor cannot explain their investment strategy to you in a way that you can comprehend, you should probably not work with him/her. If the advisor seems to have a “black box” or says the strategy has “upside with no downside” run the other direction.

It is important to know what kind of investments the advisor will use as well. Most advisors use a combination of stocks, bonds, mutual funds and ETFs in their strategies. There is no need for a strategy to be more complex than that. Simple is better when it comes to investing, despite what some may say.

Clients of advisors should also be told where the investment accounts will be held. Most financial advisors use a discount broker as the custodian of client accounts. The advisor should let the client know which discount broker they work with. This way the client understands where they will be getting statements from and how to access their funds.

What services does your firm provide?

This might seem like a dumb question to ask, but many financial firms provide different services. Some firms are all inclusive meaning they do financial planning, investment management, tax preparation, estate planning, insurance planning etc. While other firms may just specialize in investment management or another area. It is important to define the scope of the engagement prior to entering into a relationship with a financial professional.

It amazes me how little research and effort some people put into finding the right financial advisor. Just because your friend or relative refers you to their financial advisor does not mean they will also be a good fit for you. There is no right or wrong answer as to what type of advisor to work with. What is most important is to ask and UNDERSTAND at least these questions before agreeing to work with an advisor. When you sign up with a financial advisor you’re trusting that person with YOUR money, YOUR livelihood. Do the research, ask questions and don’t accept anything other than 100% transparency. It’s your future at stake after all.

Fiduciary Rule Has Led to an Awakening

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caseyThe fiduciary rule is partially in place as of June 9th. The most important thing this rule has done for the investing world is it has woken the public up to how important it is to work with a fiduciary adviser.

What does being a fiduciary even mean? Well it means that you have to act in the best interest of the client. But what does that even mean?

The difficult part is that it can mean very different things for everyone. This post will cover some key aspects that should be a part of every fiduciary relationship.

1. Honest communication between adviser and client about:

  • Goals
    The adviser needs to know what the money is for. It’s impossible for an adviser to act in the best interest of the client without this knowledge. The adviser may think they are acting in the best interest of the client but without the client communicating their goals the adviser will simply be guessing. This is a two-way street. It’s on the clients to tell their adviser what the goal is. It’s also on the adviser to ask and understand to the best of his/her ability what the client’s goals are. If the client doesn’t have any goals then the adviser should help the client set some reasonable short, intermediate and long term financial goals.
  • Compensation
    Understanding how your adviser gets paid is absolutely imperative. All fiduciary advisers should be up-front and open about their fees. If they’re not, that’s a serious red flag. An adviser that is unwilling or unable to explain his/her fee structure to their client’s is not an adviser that should be trusted.
  • Process
    A financial adviser should be able to explain their investment/financial planning process so all of their clients can easily understand it. If they can’t, their process is most likely too complicated. Keeping things simple and cheap works when it comes to investing.
  • Costs
    Every investment has some sort of cost associated with it.  Clients should know how much it’s costing them to own their investments. It’s on the advisers to let them know.

2.  Always doing the right thing for the client no matter what.

  • Sometimes fiduciary advisers are going to have to recommend a client do something that hurts their firm. This is the very essence of what being a fiduciary is all about. For example let’s say a client really needs to pay off a large debt he/she has. Their options are to either take out money from their investment account with their adviser  or open up a new credit card. Since taking on new debt just to pay off old debt is a not really getting rid of the problem, the adviser should recommend the client takes the money out of their investment account. This option would hurt the firm since the assets would no longer be under the adviser’s control. However, it would be beneficial to the client because they would be clearing some debt off their plate. A fiduciary should always put the client’s interests ahead of their own, plain and simple.

3. Limited conflicts of interest.

  • Advisers that charge an assets under management (AUM) fee or a retainer fee inherently have less conflicts than advisers paid on commission or by a wrap fee.  The real conflicts of interest are seen when “financial advisers” are incentivized to sell their firms investment products. These “advisers” get paid extra to put their clients into their firms products. Naturally these “advisers” will put their clients into the investments that pay them the most, not the investments that are in the client’s best interest.  It’s just like Warren Buffet said “never ask a barber if you need a haircut”. Never ask a “financial adviser” or stock broker (who gets paid to put you into products) for financial advice. Instead look for a fee-only adviser. There will never be a conflict free relationship, but minimizing conflicts of interest is a crucial aspect of being a fiduciary adviser.

Now that the Department of Labor’s fiduciary rule is partially in effect, I’m hopeful for the future of retirement savers. I’m slightly skeptical about how much the rule will actually be enforced. But like I said the most important thing this rule has done is it has woken investors up. It has woken them up to the fact that inexpensive, less-conflicted, honest financial advice is out there.  Now the investors just have to find it. When looking for an adviser make sure he/she covers the three aspects covered above as these should be a part of every adviser-client relationship. Especially if that adviser holds them-self out as a fiduciary.