Are you in sync with your adviser?
Even if you have a happy, long-term relationship with your financial adviser, you owe it to yourself and to him or her to review your understanding of the scope of services being provided.
This should be a regular practice, and it may be of particular interest to you now since regulators are focusing on investor confusion about services and considering changing legal standards of care. (If you missed last week's column on the subject, look for archives at www.juliejason.com, email me at firstname.lastname@example.org or call my office at 203-322-1198.)
Start the inquiry by asking for a meeting to review progress and to talk about the future. Your adviser should be happy to oblige, since it helps both of you ensure smooth sailing.
Ask your adviser to bring documents or reports that are relevant to your relationship. Documentation will differ based on the type of firm the adviser works for.
If your adviser works for a broker-dealer, you'll be reviewing a new-account form that you signed when you opened the account, as well as monthly brokerage statements and confirmations. The new-account form is important, since it records your adviser's understanding of your experience as an investor, your risk tolerance and your objectives.
Some broker-dealers provide additional reports, such as quarterly or annual performance reviews and financial plans.
If the firm is also registered as an investment adviser, be sure to review the firm's Form ADV Part 2A (also called a "brochure"), as well as the adviser's Form ADV Part 2B.
These documents cannot be ignored, as they disclose conflicts of interest, such as compensation arrangements and referral fees. They also disclose disciplinary information about the firm (Part 2A) and the financial adviser (Part 2B).
If your financial adviser works for a major brokerage firm, it is not unlikely that you invest in managed accounts. Each of the managers of those accounts has Form ADV Part 2A disclosure documents that you will want to review. Another document is your contract for advisory services.
In many cases, these documents will have been sent to you in a large packet at the time you opened your account. Forms ADV Parts 2A and B will have been sent to you in 2011 and updated with material changes after that.
If your adviser suggests that Forms ADV Part 2A and B are not important to review, consider whether you agree.
Do you need to understand how your adviser is paid? Whether he receives sales incentives to recommend one product over another? Do conflicts of interest exist in the relationship? Are there disciplinary disclosures? Can your adviser sell other financial products to you under a different compensation arrangement?
At the meeting, confirm that there are no misunderstandings about investment experience, objectives and risk tolerance. You'll find those on your new-account form or investment-policy statement. Are they consistent with your understanding? Do they need to be updated?
Next, confirm your understanding of the services your adviser is providing you and how you are compensating him for those services.
Is he providing transaction-based services that is, is he recommending that you buy a certain investment from time to time? If so, is he paid a commission (or markup or -down) for each trade? Is he also receiving any payments from product sponsors, such as mutual fund 12b-1 fees that will not be visible on a confirmation? Does he receive more compensation for selling you certain products over others?
Is he providing access to a professional money manager through a managed account? If so, is he paid a fee based on the assets you invest in the managed account? How much? How much is the total fee you are paying to all parties involved? Are there any other costs you are bearing?
You may have an adviser who has multiple bosses. For example, some registered investment advisory firms also have arrangements with independent contractor broker-dealers. If so, it can be tricky to understand when he is being paid for the sale of a product and when he isn't.
Perhaps the easiest relationship to understand is a registered investment adviser who does nothing other than provide money-management services paid for exclusively by the client, with no other sources of income to muddy the waters.
Finally, make sure you are receiving all the reports you need to assess how you are doing. We'll talk about how to make those judgments in a future column.
It pays to be in sync with your financial adviser. This dialogue will help you make sure that you understand what to expect of each other.
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford, Conn.) and award-winning author, welcomes your questions/comments (email@example.com).