Understanding the Costs of Investing

Doug Nelson, CPA, PFS

May 31, 2022

While I’m incredibly proud of my current work as a financial advisor, and previously as a CPA, the financial industry as a whole hasn’t made my job easy. Unfortunately, the financial planning industry only makes the news when something bad happens, take this headline that circulated last year, for example:

Florida woman, 94, wins $19 million fraud ruling against JP Morgan, grandsons

One day I would love to see a headline similar to this:

Family avoids large tax bill with help of advisor–enjoys relaxing dinner to celebrate

Chances are this headline will never exist, but what’s even more frustrating is the negative stories scare away people from utilizing the expertise that I and many of my colleagues bring to the table.

To be honest, when it comes to financial advice, many firms in the business of doling it out will use their advertising to encourage specific perceptions about the industry. To be fair, TCI does some of the same things too. Nevertheless, these perceptions generally fall into one of two categories: 1) size matters; and 2) you can trust us. However, we’re rarely given a very good reason why these two things should matter most. Think back to the last ad you saw for wealth management. From the carefully pitched voiceover to the friendly looking actors on screen, can you remember any specifics about the financial firm in question?

Asking the Right Questions

I can all but guarantee that you didn’t hear them answer the most important question every investor needs to ask: How are you compensated? The answer to this question has the power to make or break an investor’s experience with an advisor. If this question is so important, then why don’t investors ask it more often and why do even the big-name firms dance around it?

I doubt you’ll be shocked to learn that it comes down to money. When you ask the compensation question, what you’re really asking is about potential conflicts of interest. For instance, the compensation plan for many in the advice industry depends on commissions. In other words, they get paid based on what they sell you.

It should be noted that a few years ago the SEC implemented Regulation Best Interest. This rule aims to provide clarity for clients across the financial services industry and introduced the Client Relationship Summary, commonly referred to as Form CRS. The purpose of that form is to help investors decide whether to establish an investment advisory relationship or to engage a particular financial professional. Form CRS must include information around a firm’s relationships and services, fees, costs, conflicts of interest and disciplinary history. Additionally, it must be updated any time there are material changes and must be available on the firm’s website, if they have one. This will be one of the clearest pictures you have into the people you are potentially entrusting with your money. The form will suggest questions you should ask of the advisor and will provide free and simple tools investors can use to research firms and financial professionals. I implore you to read Form CRS carefully, and do your research, so that you can make an informed decision.

Historical Conflicts of Interest

Compensation may also involve more than just commission. Following the housing crash in 2008, emails surfaced suggesting that a prominent investment bank was selling a particular investment to clients (mortgage-backed securities) while betting against that investment. They didn’t think the investment in question was a good one, but it didn’t stop them from encouraging clients to invest.

Of course, when the news came out, this investment bank argued that everyone else had access to the same information, and the decision to bet against these securities was just a hedge against the market turning. Even assuming that’s true, it’s incredibly difficult to trust the person that sold you something on the one hand and bet against you on the other. 

Now, I don’t believe that everyone giving financial advice and receiving commissions can’t be trusted. What I do believe is that it introduces shades of gray to the process. Does the recommendation to buy a particular mutual fund really make sense for you and your goals, or does the potential commission outweigh what’s best for you? If you don’t know how someone is being compensated, it can make it very difficult to assess if you’re getting the best advice for you or the best advice for your advisor.

How TCI Avoids Conflicts of Interest

However, it’s a different story if the answer to the compensation model reveals that the only source of money is you directly. If you, the client, are the only source of income, then it’s in the best interest of that financial advisor to see that you’re happy with the results. In this situation, you’ll know exactly what you owe your advisor, and there won’t be any surprises when you open that quarterly report about what you paid. You can also have confidence that the advice you’re getting is about you and not a commission check.

I understand that it may seem like an incredibly small thing in comparison to the bigger issues we see in the industry. That said, I’d argue that understanding compensation is one of the most important things an investor can do. Unfortunately, it’s often overlooked in favor of betting on an advisor’s past performance or the idea that a secret algorithm can guarantee big returns.

As someone who might engage with an RIA my hope is that questions around compensation and conflicts of interest become a significant focus of your decision-making process. Here are some of the ways TCI goes above and beyond to remove conflicts of interest from an investment experience.

  • Fee Only: TCI is a fee only RIA. You can be confident that we are not receiving any kickbacks for selecting certain funds or receiving any commissions. As mentioned above, it is in the best interest of a TCI advisory team that our clients do as well as they can.
     
  • CEFEX certified: TCI has been a Center for Fiduciary Excellence certified firm since November 2016. This means that we meet recognized and substantiated standards of practice intended to conform to fiduciary principles and help assure that our clients’ best interests are served. To maintain this certification TCI undergoes an annual assessment conducted by CEFEX analysts to ensure that we continue to foster a culture of fiduciary responsibility and professionalism. This assessment is separate from, and in addition to, any audits that may be performed by regulators from time to time. 

    Long story short: We take our fiduciary responsibility very seriously.
     
  • Independence: Independence is a core value and something that grounds all of our decisions as a firm. Independence means being owned by employees who are active in the firm, have a vested interest in empowering purpose-filled lives and fully living out our values in our actions and relationships. Independence ensures that we are always able to act as a fiduciary, putting our clients’ interests first, thereby avoiding the conflicts of interest inherent with advisors offering proprietary products. As the financial industry continues to change, TCI celebrates our steadfast and uncompromising commitment to our clients and independence.

The world of financial advice is a tricky one for investors to navigate. Yet, the surest way to find the right direction starts with a simple question: How are you compensated?

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