Transcript Edited For Clarity

Scenario: “I worked very hard for my money and I know the value of a dollar. I started my company from just a clerk. I am no stranger to paying someone to do the hard work for me. I just don’t want someone who is slacking on the job or being overpaid and underworked. I want to feel that way about the guy managing my money as well. How do I find someone who won’t rip me off?”

Mark Hebner: Hello this is Mark.

Enpo Tu: Good afternoon Mark, this is Enpo Tu calling on behalf of My Financial Coach.

Mark: Hi Enpo, how are you?

Enpo Tu: I’m doing well thank you very much. We’re here today to have a conversation about a topic that is near and dear to the hearts of My Financial Coach listeners and I’d like to have you speak a little bit more on this topic.

Mark: Okay.

Enpo: All right. So when it comes to getting good financial advice. There are a lot of different industry standards such as the fiduciary standard, best interest clause, and things of that nature. However for someone who’s not in the industry it may be very confusing. So imagine that there is an individual who comes up to you and they’re considering hiring a financial advisor and they say:
“I worked very hard for my money and I know the value of a dollar. I started my company from just a clerk. I am no stranger to paying someone to do the hard work for me. I just don’t want someone who is slacking on the job or being overpaid and underworked. I want to feel that way about the guy managing my money as well. How do I find someone who won’t rip me off?”

So what they’re really asking is:
“How do I know my advisors are working for my retirement and not their retirement?”

Mark: Well that’s a great question and I want to start off by answering you and the way that is really helpful to your readers or listeners and that is you have to separate out a broker dealer from a registered investment adviser.

Enpo: Now Mark, before you go into that topic just for the sake of our listeners could you give a little bit of background on yourself?
Mark: Sure so my name is Mark Hebner and our firm is Index Fund Advisors. We are a registered investment adviser that has been in the business for twenty one years. We are currently managing about $3.3 billion dollars for about twenty five hundred clients across the country. And we originally started off as providing a web based type of investment advice but we have multiplied a dozen investment advisors for our firm that work directly with clients.

Enpo: Excellent.

Mark: You want me to continue now about the differences?

Enpo: Absolutely, now let’s hear it.

Mark: Yeah, so the first thing that all investors need to understand is there is a very distinct difference between a broker dealer that someone like a Merrill Lynch, JP Morgan, and a registered investment adviser like Index Fund Advisors and the primary difference is the fact that a registered investment adviser has an obligation to act in the best interest of the client even if it goes against their interests. They have what you stated upfront, they have a fiduciary duty to the client. At a broker dealer they actually have an exclusion from being a fiduciary for their clients as a part of their agreement and that’s because they sell products instead of selling advice. As a registered investment adviser they rarely make any money as the result of any products or activity that the investor engages in and instead are paid purely for their advice and usually as a percent of the assets under management that the registered investment advisor is responsible for. So that’s the primary distinction between those two types of organizations and if you want somebody who’s acting in your best interest you should be looking for the registered investment advisor known as an R. I. A.. I hope that helps.

Enpo: Absolutely now Mark there is a little bit of confusion when it comes to the different registrations that individual financial advisors have. For example there is this thing called the Series 66 which makes it so that an individual adviser can act as both a fiduciary and also in the broker dealer capacity. Could you tell us perhaps some ways that an individual might do their due diligence and protect themselves a little bit from what might be perceived as a bait and switch where they’re saying that they’re a financial adviser but they’re acting as a broker dealer.

Mark: Yes, the most important document is what’s called the ADV. It’s a securities and exchange required disclosure document that’s provided to each client when they become a client or they could even ask for it as they’re going through the process of trying to select an investment adviser and in that ADV it will disclose any of these types of conflicts and also disclosed if the firm has had any regulatory issues in the past and and a number of important characteristics of that firm. And it really would be a good idea for every investor to carefully read through that document. But the other thing you can do is just flat out ask the adviser: how do you get paid? Are you paid for any products or any investments that you recommend or are you limited to a payment just from your client and just asking that question puts that in visor in a position where they must disclose exactly how they remunerated as in how they’re paid. That’s an important aspect for all clients because it could bias the advice you’re getting if they’re paid by let’s say 12b1 fees or loads which is basically a commission for them to sell you a particular mutual fund and so there’s a number of ways that broker dealers are paid but investment advisors are very limited in ways they are paid.

Enpo: Okay so beyond just the payments and diving a little deeper into how financial advisors work. How do you feel about those individuals who are currently getting what you may consider advice that is conflicted or there may be additional things that are going into the calculation when the adviser says: “well I’m still able to get the same result even though I’m getting paid either differently or more for giving advice” Is there any answer to that?

Mark: Well I guess I would challenge whether they’re getting the same results or not. They might think they’re getting the same results. But the methodology in which an adviser is compensated can significantly affect or bias the decisions in the investments that they recommend for you. And understanding what returns are and what comparative returns are available is not a simple process and it’s all about benchmarking your returns properly and understanding all your costs that go into the investments. So I would just caution investors when they think they’re getting the same results to maybe get a second opinion. That’s another way to take a look at that or to do some research on the proper comparisons. The internet is full of tools that would help them sort this out.

Enpo: All right well that is excellent news I am glad to hear that you were able to give us a general idea of how best to look out for these things and I guess do you happen to have any closing thoughts for our listeners today?

Mark: Well I just think that it’s important that you also shop around and get a reasonable fee for the services being provided. It’s not good to find the absolute lowest fee and it’s certainly not good to pay the highest fee. I would say you want to try to determine what would be a fair fee for advice that’s being offered and make sure that you do your own research around these fees ideas so you’re paying what I call reasonable and fair fees.

Enpo: All right well thank you so much Mark for sharing your wisdom with us and I look forward to speaking with you soon.

Mark: All right thank you so much, bye.