Get Wise to Your Advisor

Steven D. Lockshin | April 2014

Choosing a Trusted Fiduciary

AdvicePeriod It’s that simple. | © 2013 2

Why did I write this book?

1.  Confusion about who is truly an “Advisor”

2.  Fiduciary versus Suitability Standard

3.  Advizent experiment was a valuable experience


© 2012 Behavior Gap


Why listen to me?

1.  History of disruptive approach to the financial services industry

2.  Founded one of the largest independent registered investment advisory firms in the US ($12B AUA)

3.  Built one of the largest TAMPs ($100B on platform today)

4.  Ranked by Barron’s for several consecutive years — most recently recognized as:

•  #1 in California for all Brokers and Advisors (2013) •  #2 in US for all Independent Advisors (2013, and #1 in 2012)

5.  Passionate about doing what’s best for consumers

WHAT PORTION OF CONSUMERS USE A WIREHOUSE OR BANK TO MANAGE ALL OR A PORTION OF THEIR WEALTH?

DO YOU BELIEVE INVESTORS UNDERSTAND WHERE THE CONFLICTS OF INTEREST MAY LIE?

Give a human an economically conflicted choice and they will usually choose poorly.

The less obvious the outcome, the greater the probability they make the wrong choice.


Full disclosure.

“Advisors who disclose their conflicts of interest actually deliver advice that is twice as bad as the advice they would give if they didn’t disclose.

Disclosure appears to give the advisor emotional license to guide investors toward whatever outcome benefits the advisor.” 1

1Daylian Cain, assistant professor of organizational behavior at the Yale School of Management.


Full disclosure.

"Disclosures did not usually give investors pause. Sometimes investors were apt because of a human connection with the advisor to feel that they should help the advisor out, even if it meant lowering their own return.” 1

1Daylian Cain, assistant professor of organizational behavior at the Yale School of Management.

CONSUMER USE OF REGISTERED INVESTMENT ADVISORS (RIA) TO MANAGE ALL OR A PORTION OF THEIR WEALTH? ….how many consumers read the ADV?

ASSET ALLOCATION

MANAGER SELECTION

LIFE, TAX, ESTATE

PLANNING ASSET

ALLOCATION MANAGER SELECTION

LIFE, TAX, ESTATE

PLANNING

11 AdvicePeriod It’s that simple. | © 2013

WHAT YOU PAY FOR WITH MOST ADVISORS WHERE YOU GET TRUE VALUE

Most advisors focus on manager selection and asset allocation — and offer to give away the planning.

However, the value of effective and quality planning trumps investment management every time.

Effective planning trumps investment management…what do consumers pay for?


Fees Matter!

© 2012 Behavior Gap

*A person in a position of authority whom the law obligates to act solely on behalf of the person he or she represents and in good faith. Unlike people in ordinary business relationships, fiduciaries may not seek personal benefit from their transactions with those they represent.

What should an advisor be focused on (and the relative impact)?

ESTATE + TAX PLANNING

ASSET ALLOCATION/

PORTFOLIO RE-BALANCING

FEES

MANAGER SELECTION

QUALIFIED EXPERT FIDUCIARY* ADVICE



Who to choose?

1.  Brokers

2.  Banks, Trust Companies, Asset Managers

3.  Registered Investment Advisors

38.0%

17.9%

14.0%

7.3%

15.3%

5.1% 5.4%

0.0% 5.0%

10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0%

Wirehouse IBD RIA Dually Reg. Regional Bank Insurance

2010

2013

14+% and growing…but not all fiduciaries

Your advisor should adhere to the highest level of duty and loyalty to clients, always putting your interests ahead of his or her own.


Your advisor should make every effort to keep clients’ assets safe from fraud and keep client information private.

Your advisor should operate his or her business according to the highest standards in the industry.

Duty

Standards

Safeguards Professionalism


1. Brokers (most but not all)

•  The more things change, the more they stay the same. Most brokers and bankers celebrate the success of commissions earned or products sold, not the quality of advice given.

•  Conflicts of interest (situations where your advisor has to decide whether to put your needs ahead of his) are the key ingredient in the recipe for bad decision-making, and disclosure is not the antidote.

•  Most brokerage firms are simply hundreds — or thousands — of individual brokers or small teams. Brand has won the day, not value to consumers.


2. Banks, Trust Companies, Asset Managers

•  Banks: typically have their own product and do not hire top talent (can’t/won’t play)

•  Trust Companies: often part of a bank (product). Watch out for the fox guarding the henhouse.

•  Asset Managers: “I’m a hammer, so everything else is a nail.” Won’t ever fire themselves.


3. Registered Investment Advisors

•  RIAs supervised by the SEC are held to the fiduciary standard; although, there exists a giant loophole they can exploit.

•  There is virtually no barrier to entry for becoming or remaining an RIA.

•  The giant loophole – “avoid or disclose” – allows conflicted advisors to meet the fiduciary standard. Beware of RIAs that bury disclosures in their public disclosure documents (specifically their form ADV, which they must offer when you meet them). Fancy language and a mountain of paper hides many a conflict.


Passive vs. Active

“The investment management world is a strange place in that the right solution is not in the middle. The right solution is at one extreme or the other. One end of the spectrum is being intensively active. The other is being completely passive. If you end up in the middle, which is where almost everybody is, you pay way too much in fees and end up getting subpar returns.”

– David Swensen, Yale Endowment


“Transparency is well and good, but accuracy and objectivity are even better. Wall Street doesn’t have to keep confessing its sins. It just has to stop committing them.” 1

1James Surowiecki, “The Talking Cure,” Talk of the Town Column, The New Yorker, December 6, 2002.

BOTTOM LINE: DO YOUR HOMEWORK Email [email protected] for a copy of your advisor questionnaire.

GET WISE TO YOUR ADVISOR

Steve Lockshin [email protected]

Economy & Finance

Get Wise to Your Advisor