By JOHN F. WASIK
What do you do when your financial adviser becomes damaged goods?
That’s surely on the minds of thousands of clients of firms like UBS Financial Services, which is embroiled in a recent trading scandal, and Bank of America Merrill Lynch, which is suffering myriad financial woes.
If you’re concerned about whether an adviser’s parent firm is going to survive a crisis or if you’re not happy with your portfolio, there are some important questions to ask before you make a change to a new wealth manager.
Brand reputation is often the linchpin for advisory relationships. You should expect a wide range of services and extensive handholding from a top-tier firm. But when the company is tarnished, top executives and advisers often resign or are fired.
Take UBS, the Swiss bank that was once one of the most powerful brands in wealth management. At one point before the 2008 financial crisis, it employed 8,000 advisers. It was one of the largest managers of private wealth, with $1.7 trillion in client assets. Since the crisis, the firm has lost more than 1,000 advisers.
After it was revealed that a UBS trader had lost $2.3 billion from unauthorized trading, the company’s chief executive, Oswald Grübel, and other managers resigned.
If you are with a troubled firm, how do you know whether or when to move on?
The financial advisory industry is going through climactic change. The Securities and Exchange Commission is writing a rule that will make brokers and advisers become fiduciaries. This means that if they don’t put your interests first, you can sue them, which is not the case with most securities brokers and agents now, as they are governed by a looser standard of whether an investment they recommend is “suitable.”
“Don’t think that brand names are important when the industry is going through a paradigm shift,” says Paula Hogan, a certified financial planner (C.F.P.) and chartered financial analyst (C.F.A.) who is based in Milwaukee. People do not care as much about portfolio returns as they do about maintaining a standard of living for a lifetime, she said, and many high-visibility firms focus more on returns and less on comprehensive financial planning.
Finding an adviser who already acts as a fiduciary — while not a fail-safe standard — offers better investor protection than the broker-dealer model.
Generally, most fee-only C.F.P.’s, C.F.A.’s, lawyers and accountants who do personal financial advising have a written standard of care that combines a code of ethics with extensive pro-client guidelines.
Fees also provide an insight into the relationship you will have with a firm. Do they charge for assets under management or an hourly rate for planning services, or both? Do they earn a commission on their recommendations?
“Where does your adviser get their compensation from?” Mr. Hogan asks. “Do they own another business that benefits from their recommendations to you, or does the business own them?”
Don Trone, a fiduciary consultant with 3Ethos in Mystic, Conn., said he looked at credentials carefully. He favors C.F.A.’s because of their rigorous training in investment analysis, as well as those who are constantly updating their knowledge “through a commitment to lifelong learning.”
In addition to preparing an investment policy statement outlining your financial goals and risk tolerance, a worthy adviser must have the ability to listen, Mr. Trone said.
“They should adopt a consultative approach,” he said. “They should sit down and listen to you and write on a legal pad your goals and objectives. I like the 70/30 rule. You should do at least 70 percent of the talking and not vice versa.”
Yet even if an adviser is a great listener, the bedside manner can often cover some huge problems. Just ask the victims of Bernie Madoff. The next level of your inquiry can get at some of the most troublesome conflicts.
Stephen Horan, head of private wealth management for the CFA Institute in Charlottesville, Va., which represents chartered financial analysts, says it would be worthwhile to ask for an adviser’s Security and Exchange Commission’s ADV Form, Part II. This document is supposed to list any potential conflicts of interest and specify how advisers are compensated.
While you may grimace at the thought of poring through a disclosure form, you will learn if the adviser is paid referral fees by financial product firms, information about their transaction costs and where they hold your assets. This last item is critical. Ideally, your money should not be held by the adviser’s firm. You need a trusted third party holding your cash.
Several specialized search engines will check for disciplinary or legal actions and summarize the firm’s record. While it is not possible to know everything about an adviser, you can also learn a lot by how much attention they pay to ethical codes and adherence to tougher global guidelines, including the Global Investment Performance Standards, industrywide ethical benchmarks recognized in 32 countries.
“The world’s imperfect, and you can’t hold an adviser to impossible standards,” Mr. Horan says. “But a code of ethics and standard of practice is important. Just because a broker’s background check comes up clean doesn’t mean it’s a seal of approval.”
Ultimately, finding the right wealth manager goes beyond what the firm can bring to the table. They need to make the time investment in you and your objectives, and you need to complement the process by asking the right questions before engaging with them.
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