Cooking Techniques and Financial Management

Whether baking a cake or preparing unique dishes, both require the necessary and assorted ingredients: time, expertise, finesse and the ability to tweak the recipe to obtain the desired results. Guess what? Portfolio construction and financial management may not be all that different. In effect, a financial professional is expected to build an investor’s portfolio after carefully ascertaining precisely what is the individual’s risk tolerance, challenges, goals, timeline for investing and end-point needs.

How Many Financial Titles Are There?

How does an investor go about locating a financial professional in the universe of available services and the multitude of different titles? Titles include: CFP® provider, CFA, CPA, CLU®, ChFC, financial advisor, financial planner, money manager, broker, agent, money coach, banker and so many more. The litany of titles seems endless and seemingly melds into a common message: Entrust me with your money to invest, sit back, watch and wait for the results. Which standard will be engaged with managing a portfolio or assets–fiduciary or suitability? The hyperbole of financial titles is not only confusing but may cause investors to ultimately throw up their hands in angst.

Fiduciary vs. Suitability Standards

Given that fiduciary and suitability standards exist, it behooves an investor to understand the differences when selecting a financial provider for advice. Is this person legally bound to always act in your best interest? How are they paid? Fee only, fee based, commission, retainer fee, hourly or a combination of options? Are fees transparent or not clearly understood? Do products selected offer the lowest investment fees to the investor or pay the highest fees to the financial provider?

This has become so troublesome that the Department of Labor (DOL) developed and instituted a fiduciary requirement for all financial providers who deal in retirement assets unless a waiver is obtained. As with any regulation, challenges occur and ultimately go to court for adjudication. Personal finance reporter Lorie Konish wrote, “The Department of Labor has partially implemented its rule, with the remainder currently set to take effect in 2019. The rule would require brokers and other financial professionals to act with their clients’ best interests in mind when giving retirement advice.”

However, a recent ruling by the Fifth Circuit Court of Appeals vacated the DOL rule. Jeff Benjamin of Investment News reported, “The latest body blow to the Department of Labor’s fiduciary rule continues to divide the financial advice industry.” Ultimately, if appealed and accepted to be heard, the Supreme Court will weigh in with their decision. In the meantime, the U.S. Securities and Exchange Commission (SEC) is continuing with its own plan to have a proposed fiduciary rule by year end. However, with the Fifth Circuit negating the DOL rule, the unknown is whether the SEC will water down or strengthen their proposed rule.

Investor Protection: 1940 Investment Adviser Act

According to the 1940 Investment Adviser Act, a financial provider is considered a fiduciary if the three-prong test (A-B-C) is satisfied. The College for Financial Planning stated a financial advisor is a fiduciary if (A) advice or analyses of securities is done, meets the (B) “business” standard of providing investment advice and receives (C) compensation.

However, the Act allows for exceptions and exemptions. As such, a broker exception exists. Investment News writer Mark Schoeff Jr. indicated, “Under the exception, a broker is not an investment adviser if the advice she gives to a client is “solely incidental” to a sales transaction. But if a broker wants to dispense personalized financial advice, she has to be a fiduciary and register as an investment adviser.” Barring exceptions and exemptions, anyone who meets the A-B-C test in effect is viewed as a fiduciary advisor; as such, he or she is ethically and legally bound to represent the client’s best interests.

Be Informed

These are sources of information to access and help answer many questions before engaging with a financial provider:

It’s Your Money

Always remember it is your money to invest and safeguard. Whomever you ultimately select to consult with and hire, it is your responsibility to ask questions and get answers that you understand. Expect to receive timely monthly and quarterly reports, and at a minimum a yearly face-to-face review. Ask trusted family and friends for referrals. Research potential financial providers for any negative reports and then interview two to three potential candidates.

The financial provider selected should be professional, knowledgeable, experienced and forthright with all your questions and concerns. Intuition may your best litmus test for a final decision. If any doubts arise, take time to rethink your decision. The markets are available, welcome your participation and will answer the question of how would you like that: Rare, medium or well done?

Dr. Wolfson is a financial consultant and advisor. He retired after 27 years of active chiropractic practice. Dr. Wolfson can be reached at (631) 486-2792 or [email protected]. View more published articles here.