Stern Advice-How to make sure your adviser really puts you first

Linda Stern
Wednesday, 13 Nov 2013 | 3:27 PM ET

NEW YORK, Nov 13 (Reuters) - The brokerage industry is reaching out to consumers with a new "Investors First" initiative designed to win the hearts and minds of those who are skeptical of Wall Street advisers.

The initiative, unveiled last week in Washington by the Securities Industry and Financial Markets Association, a trade group representing the nation's largest brokerage firms, currently consists of a pamphlet for consumers encouraging them to work closely with their investment professionals. But it's just the first of a series of steps that SIFMA says it will be rolling out to "demonstrate our commitment to putting customers first."

Language like that is becoming more common whenever brokerage firm representatives speak. Executives from big-name companies have recently been calling reporters to off-the-record sessions to discuss how crucial customer satisfaction and service are. These firms are continuing a long trend of beefing up their financial planning services and de-emphasizing their broker-as-stock jockey past.

"We have to continue to challenge our associates in our firms to remember that putting clients first isn't just something we say, it's something we do every day," Chet Helck, chief executive of Raymond James Global Private Client Group and SIFMA chairman, told the SIFMA annual conference this week in New York.

That should be good news for the investing public, right? Perhaps, but some context and some specifics would be good, too. Here is a quote from SIFMA's pamphlet for individual investors:

"You have the right to ... receive personalized investment advice about securities that is in your best interest.*"

Note the asterisk. It leads you to a footnote explaining that the U.S. Securities and Exchange Commission has been considering writing a rule that would require anyone providing personalized investment advice to retail customers to meet a fiduciary standard.

It is the prospect of such a rule - under discussion for years and years - that provides context for the brokerage industry outreach. The industry is trying to get ready for an era of higher regulatory standards for advisers.

A true fiduciary is required to put the interests of a client ahead of the fiduciary's own interests. Today, brokers under the SIFMA fold don't actually have to do that - they simply have to make recommendations that are suitable for clients, even if they put more money in the broker's pocket than the client ends up with.

SIFMA is on record as saying it supports a standard that would require brokers to act in the best interest of clients. But it does not support the most stringent proposals, such as those could limit the ability of commission-earning brokers to provide retirement advice.

In the meantime, brokers and fee-only financial advisers are trying to win and keep clients who have trillions of dollars in retirement assets and want help managing it.

Those clients are on their own to determine whether the adviser they are using is putting them first and serving their best interests. Here are a few ways to make sure your adviser is a keeper.

- Your adviser explains everything to you in a way that you can understand. He or she clearly lays out the investment strategy and how much you are paying for the advice and how much you are paying for the products that are recommended. Your adviser never tells you that things are too hard for you to understand or that you've asked a silly question, nor does your adviser ever make you feel that way.

- Your adviser doesn't describe himself or herself as "fee-based" without explaining specifically what that means. It is a term of art. "Fee only" means the adviser doesn't get paid to sell products, you pay for unconflicted advice. "Commissioned" and "free planning" means that the broker is being paid to sell you products, so the plan may be skewed by the products he or she is paid to sell.

"Fee-based" doesn't mean anything specific - it usually means the adviser will charge the fee AND may also be compensated to sell you products. Sometimes, it just means that the adviser has switched to a fee-only model, but still gets old commissions on products he sold back when he was a broker.

- Your adviser puts you in investments that are inexpensive and high performing. That is what you hire him for, right? It may not be fair to ask your adviser why she isn't beating the Standard & Poor's 500 index, up 24 percent this year, if you also own bonds and foreign stocks and real estate.

But look at the portion of your investments that your adviser has in a big company U.S. stock fund. Compare the annual return and fees (reported as "expense ratios") of that fund with an inexpensive index fund or exchange traded fund, like State Street's SP 500 ETF, with a year-to-date return of around 25 percent and an expense ratio of 0.09 percent.

Not every investment will be that cheap. But monitoring how your adviser treats this basic and broadly held category is a good way to observe how she treats your wallet generally.

- Your adviser offers you an investment strategy that makes sense in the context of your financial goals and in the context of your own personality. For instance, if you're the type of person who is afraid to take any risks, you can expect to earn less in your portfolio, and you can't blame your adviser for that.

- Your adviser knows your tax rate and your tax situation. Lots of investment decisions ride on your tax bracket. If your adviser hasn't asked this question, she isn't serving you as well as she could be.

- Your adviser keeps your money safe. Your money should be held at a bona fide brokerage firm insured by the Securities Investor Protection Corp. That way, you'll get statements that show you that your funds are tucked away safely. It's not a guarantee that your adviser will always beat the market, or that you won't lose money. But it is a guarantee that your adviser doesn't have your money stuffed in his suitcase.