When No is a Positive

Sam Swift, CFA, CFP®, AIF®

Aug 17, 2017

There’s a battle raging in my household right now about which word my two-year old son will say more often through 2017: No or Mine. “No” was the clear leader for the first few months of the year, but “mine” is making an epic comeback as my son claims possession of nearly everything (his bottle, his cousin’s bottle, my phone, our dachsund’s ears, our dachsund’s legs, any toy within a 26 mile radius, every grape at the grocery store, etc…). Nevertheless, I still am betting on “no” winning the year.

As frustrating as that answer can be from a toddler, it did strike me that the “no” mentality can actually be a solid strategy when thinking through who you’re working with as a financial advisor. In fact, there’s a few simple questions you can ask where no is exactly the answer you want to hear!

Do you get paid differently based on your investment recommendations for me?

If you’re in the position of asking anyone for advice, you should know how they are compensated. If the advisor stands to make a larger commission or is paid more handsomely for one recommendation over the other, that’s a major  conflict of interest. Variable compensation doesn’t preclude an advisor from acting in your best interest, but you have every right to be skeptical. Could you really be sure that the advice that was best for you was also the advice that happened to pay him more? A Chevrolet may be the ideal car for my family, but I’m pretty confident a Ford salesman isn’t going to steer me in that direction. A reasonable fee that is independent of any recommendation is ideal.

Do you have direct custody of my money?

Bernie Madoff had direct control of his client’s money. Most Ponzi schemes have to exercise custody of their client’s money so they can steal it and use it to pay out false returns. Indeed, there are some instances where a trusted advisor will have legitimate reasons to have direct custody, but in those instances you better make sure they have a legal obligation to act in your best interests and be very clear about what they can and can’t do with those funds. Again, a “yes” answer to this question doesn’t have to be a deal breaker, but it should raise your level of skepticism.

Would you ever put your own interests ahead of mine?

I cheated on this one so that “no” is the answer we want to hear, but I actually like the impact of stating it in these terms. If you ask an advisor if they are a fiduciary and they say no, they are admitting they may consider their interests first when it comes to your advice. It really is that simple. There are too many advisors acting in a fiduciary capacity to expose yourself to the potential conflicts of one who does not.

It all goes to show that there are indeed times when we should demand to take “no” for an answer. Just don’t tell my son that.

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