To get a framework upon which to formulate questions to ask your adviser, I encourage you to read Pages 5 through 93 of the Securities and Exchange Commission's 166-page "Study on Investment Advisers and Broker-Dealers," released in January 2011. The study was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act and is at http://www.sec.gov/news/studies/2011/913studyfinal.pdf. While you may think I'm kidding about taking the time to read it, I'm not.
"[R]etail investors generally are not aware of these differences or their legal implications," concluded the report. But, you will be informed.
Meanwhile, FINRA, the regulatory body overseeing broker-dealers, has just issued an important October 2013 "Report on Conflicts of Interest" that I also recommend you read.
This report, which you can find at www.finra.org, is written for firms that employ more than 600,000 financial advisers, one of whom is likely to be your adviser. The report identifies conflicts of interest that firms must address. For example: conflicts in the design and sale of investment products, structured and complex products, product distribution, revenue sharing, compensation, disclosure obligations, hiring and training practices, supervision of sales activities, sales activity that occurs near compensation thresholds such as a firm's President's Club, back-end recruitment bonus payments, and financial incentives that encourage employees to "push registered representatives to achieve … performance targets without proper regard for suitability, hire poorly qualified registered representatives to meet hiring targets or perform oversight tasks in a manner favoring productivity standards over quality of oversight."
These types of conflicts are imbedded in your relationship with your financial adviser. Reading about them can help you assess the type of information you will want to elicit when interviewing your adviser.
On www.finra.org, you also will find notices to firms that employ financial advisers to remind them of their "sales practice obligations." For example, there is a notice about sales practice obligations in the sale of bonds and bond funds, nontraditional ETFs, high-yield securities and so on. These notices give investors an inside view of the regulator's expectations.
And it takes an insider's view to fully comprehend the lay of the land.
For example, did you know that when your financial adviser changes firms, the new firm may pay him an incentive to make the move? Called "recruitment compensation," this arrangement can require the adviser to meet performance targets, which can open the door for sales abuses motivated by increased compensation. Last month, FINRA, for the first time, proposed to the SEC that recruitment compensation be disclosed to customers. Recruitment compensation can be one to three times 12-month trailing gross production.
It's clear that Americans are not financially literate enough to evaluate products and services, as confirmed by the "Financial Capability in the U.S., Report of Findings from the 2012 National Financial Capability Study" released May 2013. The report was commissioned by the FINRA Investor Education Foundation and was developed with the U.S. Department of the Treasury and the President's Advisory Council on Financial Capability.
As the report stated, "Managing one's finances is a complex set of challenges in the best of times, requiring a combination of skills, judgment and resources." For information on the Investor Advisory Committee to the SEC, go to http://www.sec.gov/spotlight/investor-advisory-committee-2012/fiduciary-duty-recommendation.pdf
This gives you the background, but I'm out of space. On my website (www.juliejason.com), I'll post a list of questions for you to use depending on the type of adviser you are working with.
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford, Conn.) and award-winning author, welcomes your questions/comments (firstname.lastname@example.org).