The third rule of investing sounds pretty easy: Know your investment professional.
It’s actually not that easy. Most of you have heard someone say, “Work with someone you trust.” That is great advice and could almost be a rule all on its own. But that just isn’t enough. The hard part in our business is finding someone you can trust that does what you need.
In the early 1990’s, banks, brokerage firms, insurance companies and pretty much anyone who could claim to be in the investment business were given free rein to title their business card anyway they liked. When I got my Series 7 license in 1985, my first business card read “Stockbroker” and I was proud to be one. It doesn’t say that now because I don’t broker anything.
I give advice for a fee and that is a much different relationship. The problem is that it is perceived to be more attractive to the client to be an adviser or a consultant. So now you see a lot of business cards that say adviser or consultant and they may actually be doing neither.
You may say that your investment professional certainly gives you advice, and I am sure that is true, but what matters is what you have hired him/her to do. If you are like many investors you don’t need an adviser. You may want to make your own decisions, and you need quality information on a timely basis from someone who can access any product that you may need.
For that situation, you need a stockbroker. You may need information on various insurance products that would fit your lifestyle and an insurance broker would certainly fit the bill. These investment professionals do not, by definition, get paid to give you advice. They get paid to sell you investment products and you are the one responsible for making sure it is what you need.
Consultants and advisors are similar in our business, but traditionally there is one major difference. Consultants are paid to give you advice, but they do not normally take on fiduciary responsibility for their advice, and the client is still the one who makes the final decision. Consultants shouldn’t be selling products, even though that water has become muddy in recent years.
Advisers are paid to advise their clients on their investment portfolio and they do take on fiduciary responsibility for their advice. They also are required to keep up with those investments and provide ongoing advice. That is true for consultants as well, but not true for brokers. Many advisers take on discretion for their clients and make the day-to-day decisions on their clients’ behalf. That is a much different relationship.
So, if you want to make your own decisions and just need information, an adviser is not what you need. It may be hard to find what you need because so many people use adviser on their business card. If you need a more holistic approach, an adviser may be just right. At the end of the day it is very hard to sell product and give advice – they are two different animals.
The reverse is true as well. Finding someone you trust is critical to your ability to stay the course with your plan, but surely you can find someone you trust who is actually doing what you need them to do.
That is the Holy Grail for the investor.
Scott Reed is CEO of investment advisory firm Hardy Reed in Tupelo. Contact him at (662) 823-4722 or firstname.lastname@example.org