Secrets Financial Advisers Never Tell Series- Day 3 – Registered Investment Advisers

When you look for a financial adviser, it’s all about trust. Right?

Rather than rely on your adviser’s facial appearance, let’s see if we can learn more about how advisers are licensed, trained and compensated to find someone you can trust.

On Monday we spoke about Certified Financial Planners and yesterday we spoke about insurance agents and stockbrokers. Now let’s look at fee-based planners.

Enter….if you will…the world of the Registered Investment Adviser.

If someone charges a fee to provide financial advice, they must become an Registered Investment Adviser.

Registered Investment Advisers don’t work on commissions.  They work for fees.  Either they charge you an hourly fee, a fee for a project (like creating your financial plan) or a fee for assets they manage for you.

Registered Investment Advisers are either registered with the SEC (if they manage over $25 million) or with the state they operate in (if they manage under $25 million).

The difference between RIA’s and insurance agents and stock brokers  is that RIA’s don’t charge commissions for their work. They can’t.

What’s the difference between a fee and a commission….it still costs money..right?

True.  But when I pay someone a commission to sell me a widget, I don’t know if he sold me that widget because he makes the most commission on it or because he really really cares about me like he seems to.

If I pay someone a fee, he theoretically has no interest other than making sure I get the best widget there is.  Of course it doesn’t always work out this way, but you have better odds of working with some who is partial to you if you work with a fee-based planner.

How does one become a Registered Investment Adviser?

You take a few tests and fill out some paperwork.  Not a huge deal.  In my opinion, this process does nothing to guarantee qualifications.  It doesn’t speak to expertise or trustworthiness .

Often, a Registered Investment Adviser works in a small office with maybe 2 or 3 associates. However, some large firms do exist.  The reason this is important to you as a client is that you want to make sure you get unbiased advice.  If you work with an adviser from a large firm, you’re more likely to get advice that has been filtered through the top people at the firm.  Typically, the smaller the firm, the more independent your adviser will be.  This of course can work for or against you…but it’s just nice to know who is really calling the shots.

(Disclaimer:  I am a Registered Investment Adviser and I work in a small office.  I work this way because it suits me and my clients but I clearly have a bias. I have tried to take my bias out of this while being honest about my experience at the same time but take it in with a grain of salt.)

For my money, I want to be sitting mano el mano with the person who is making the recommendations.  I don’t want an order clerk masquerading as a financial adviser.

So the benefits of using a Registered Investment Adviser is that she is not beholden to a large management infrastructure (if she works for a small firm).  But while this can be a benefit, it also reduces the scrutiny the adviser is subject to.

Who oversees RIA’s?

Once in awhile, the SEC or Department of Corporations will come in and audit the firm but this is by no means any guarantee that the firm you are working with is above board.

Let me give you an example of how the SEC misses a small problem every once in awhile.

Bernie Madoff.

Bernie was a Registered Investment Adviser and the SEC was supposed to be auditing him. Ooops.

Bernie got away with being the biggest shiester of all time – at least so far.   To be fair, being a Registered Investment Adviser helped him get away with it for a long time but it really wasn’t the main reason he was able to perpetrate his evil fraud.

How did Bernie do it?

RIA’s usually manage money for people at a large custodian like TD Ameritrade, Fidelity or Schwab. This is important because it creates a “fire wall” between the adviser and your money.  If an adviser tries to steal money from an account at Fidelity for example, you’ll see it because Fidelity sends you statements.  The use of a custodian is an important safeguard for you.

But Bernie didn’t do that.  He formed limited partnerships and hedge funds.  These entities have almost no scrutiny by outside authorities.  It’s a black box – and it can be sort of like that old roach killer commercial.  Your money checks in…..but never checks out.  Yikers!

The reason I point this out is to help you protect yourself.  If you work with anyone and they try to get you to put money into a limited partnership or hedge fund, be very careful.  Be sure you understand how secure (or insecure) your money really is.

This does not mean that all partnerships and hedge funds are terrible and dangerous.  Most of the people who run them are honest.  It’s just that these set-ups are easy to use to steal money from clients.

Sometimes other professionals use these same set-ups to rip off their clients. CPA’s, business managers and lawyers get caught with their hands in the cookie jar too.  So it’s not so much that RIA’s are the risk….it’s these types of investments that can be treacherous.

Now that you have the basics, we’re going to the advanced class.  Tomorrow, I’ll give some inside information on how to avoid the biggest traps some of these advisers set.

Secrets Financial Advisors Never Tell – The Series. Day 1 – Certified Financial Planner

I recently received an email from a inquiring Wealth Pilgrim asking me how to become a professional financial advisor.  Along that line of questioning, he asked if I thought he should become a CFP (R) (Certified Financial Planner).