How to Choose the Right Financial Professional | SJS Investment Services
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How to Choose the Right Financial Professional

July 9, 2015
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If You Know One Thing About Investing, Know This

 

You’ve worked hard your whole life; you have built your life’s savings, maybe from the sale of your company, through frugal living, or through some other means. You can’t leave that money in a bank. You want it to work for you and the people and causes you love. You want it to be there as you age. You need a financial professional to assist you. Where do you turn?

 

According to a February 2015 report published by the White House Council of Economic Advisers (CEA), making the right choice could save investors $17 billion per year. Yes, that’s right – $17 billion. That’s the amount the CEA says investors lose on their independent retirement accounts due to a financial professional’s conflict of interest. The CEA also found that conflicted advice leads to lower investment returns. (“The Effects of Conflicted Investment Advice on Retirement Savings.” White House Council of Economic Advisers, www.whitehouse.gov, February 2015.) In other words, some professionals appear to be providing advice that is not in their clients’ best interest.

 

You might be wondering how someone who is “advising” you – which by definition means guiding, informing, and counseling – could be in conflict to your interests? That would be like your kids’ high school guidance counselor purposely steering your son or daughter toward a particular college not because it’s best for the student, but because it is best for the counselor. Who would tolerate that?

 

Conflict of interest has a legal definition, but in simple English it means: providing advice that benefits a financial professional or his company, and not the investor. Before I started SJS, I worked in the sales-focused brokerage world. Those are the jobs many young people get coming out of college, and I was no different. Every day, I’d come to work, call up people on my list and tell them the investments they should buy. I didn’t make a dime unless I made a sale and a trade occurred. It was a brutal job, and at the young age of 22 I discovered the meaning of conflict of interest. I didn’t like it very much. In fact, I found it so uncomfortable, I almost left the industry I had wanted to be a part of since I was 12 years old.

 

Consider another example, from April of this year. BlackRock Advisors agreed to pay a $12 million penalty to settle charges filed by the Securities and Exchange Commission (SEC) that BlackRock failed to disclose a conflict of interest created by the outside business activity of one of its top portfolio managers. (“BlackRock To Pay $12M To Settle Fiduciary Duty Charges.” Financial Advisor, April 20, 2015.) The portfolio manager in question was managing energy-focused funds and other accounts at BlackRock when he founded a family-owned and operated oil and natural gas company. He later formed a joint venture with a publicly traded coal company that eventually became the largest holding (almost 10%) in the $1.7 billion BlackRock Energy & Resources Portfolio, the largest fund he managed. The SEC found that BlackRock knew and approved of the manager’s investment as well as the joint venture, but failed to disclose this conflict of interest to either the boards of BlackRock registered funds or its clients. “By failing to make such a disclosure, BlackRock deprived its clients of their right to exercise their independent judgment to determine whether the conflict might impact portfolio management decisions,” said Andrew Ceresney, director of the SEC’s Division of Enforcement.

 

So how do you know whether you are being given advice that is in your best interest? The answer lies in one word: fiduciary. Although it’s a technical-sounding word, “fiduciary” has a simple definition, and understanding it could save you money, time, and aggravation. Simply put, a fiduciary has a legal responsibility to put your best interests first, not his or her own.

 

Fiduciaries have a responsibility to provide you with a strategy designed to deliver the best possible net return given the level of risk you are willing to take. Since no one can control the ups and downs of the market, this responsibility plays out by making sure they minimize fees and minimize trades (AKA taxable events), so you are able to keep more of your money.

 

If getting advice from a fiduciary is in your best interest – and, in the interest of full disclosure, SJS Investment Services is a fiduciary – how do you tell if you are working with one? How do you select a financial professional where you come first? The answer is: shop around and follow these simple guidelines:

  • Ask, “Are you a fiduciary?” and if the answer isn’t, “Yes,” or this person isn’t a Registered Investment Advisor (RIA), or doesn’t know what a fiduciary is, consider moving on. 
  • Ask for references of current and past clients to learn why people stay and why they go.
  • Avoid any financial professional who doesn’t want to really get to know you, your goals, and your needs.

I started SJS in 1995 because I knew the only way I could stay in the investment services industry was if both my client and I could sit on the same side of the table. It was my way of preserving and actually fulfilling my boyhood dream. And ever since that first day, I can say without hesitation that we have put our clients’ needs first. Our tag line, “You come first. All the time. Every time.” isn’t an ad pitch. For us, it’s a way of life.

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