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What with the baby boomers approaching retirement and the shift from traditional employer paid pensions to employee-managed 401(k)s, more Americans could use some good professional financial advice. But finding the right financial advisor is itself a tricky business—so much so, that some rich folks hire an advisor to advise them on advisors. Too many advisors for your bank account? Then read this guest post by Doug Black, the founder of SpringReef Partners LLC, one of those firms which helps the wealthy evaluate advisors. In it, he identifies four crucial issues to focus on when picking an advisor or evaluating one you’ve already got. Prior to launching SpringReef, Black was Head of Strategic Business Development and the Chief Operating Officer of Private Wealth Management for UBS Wealth Management.

Four Issues To Watch For In Your Wealth Management Relationship

By Doug Black

If you’re currently working with a financial advisor, do you ever find yourself wondering if you’re getting a competitive return on your investment portfolio? Do you question whether or not you’re paying a fair and reasonable fee? Or, if you’re in the midst of searching for a new financial advisor, does each firm sound just a little too good to be true?

If these types of questions sound familiar, you can take comfort in that fact that you’re not alone. Over the years, we’ve met hundreds of investors who have expressed similar uncertainties regarding their wealth management, and given the nature of the industry, it’s not very surprising.

The truth is that the financial services industry is an opaque, sales-centered business in which financial advisors are hired, trained and retained based on their sales ability, not on their investment acumen or experience. When coupled with the significant lack of transparency prevalent across the industry, distinguishing a truly best-in-class advisor from a slick salesman can be extremely difficult for most investors.

If you’re looking to break through that sales veneer and evaluate a financial advisor, either your current professional or one you’d like to hire to manage your assets, you might be wondering, “Where do I start?”

Though there’s a great deal that goes into a comprehensive advisor assessment – at SpringReef Partners. we assess advisors on nineteen qualitative and quantitative factors – there are four critical issues you should watch for as you begin to evaluate your existing or prospective wealth management professional.

Issue 1. The Blemished Background

The first thing you should do when evaluating a financial advisor is to check his or her regulatory record using FINRA BrokerCheck or the SEC Investment Adviser Public Disclosure website. It’s free, it’s easy and it’s quick, and it can potentially save you from making a costly and often irreparable mistake.

According to an analysis conducted by the Wall Street Journal . one in every eight brokers has at least one disclosure on their regulatory record, the likes of which vary from customer complaints, regulatory actions, bankruptcy, termination, and even some criminal charges. As an informed investor, you owe it to yourself to know whether the advisor with whom you’re working or planning to work is among this group.

Another major issue we see on advisors’ regulatory records is frequent movement between firms. Advisors often receive significant compensation to move from one wealth management firm to another and are incentivized to get their clients to join them. If an advisor moves too often – say, every 3 to 5 years – it may well be that they are putting your financial interests behind their own.

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Issue 2. Conflicts of Interest

Most investors believe that all financial advisors are required to act in the best interests of their clients at all times. Unfortunately, for at least a portion of their client interactions, 85% of advisors are only required to adhere to the suitability standard, which mandates that the products and services they recommend be suitable given a client’s overall financial positions, risk tolerance and investment objectives.

Unlike the fiduciary standard, which requires advisors to, among other things, place their clients’ interests before their own, the broad nature of the suitability standard offers advisors a great deal of leeway regarding what they offer to clients. Not surprisingly, this creates an opportunity for significant conflicts of interest, many of which center on advisor or firm compensation.

What does this issue look like in an actual wealth management relationship? Consider the following example:

You have $100,000 that you’d like to invest towards a specific financial goal. Your advisor can offer you two similar products to help achieve this goal – the first is an S&P 500 index fund with annual imbedded expenses of 7 basis points (equal to seven one-hundredths of 1% or $70 per year), and the second is an identical fund with embedded expenses of 1.42% ($1,420 per year). Both products are considered suitable given your circumstances and goals; however, one is obviously more lucrative to the advisor. If your advisor is working under the suitability standard, he or she has no obligation to choose the less expensive option, regardless of the fact that doing so would be in your best interest.

How can you stay ahead of this issue in your wealth management relationship? The phrase “follow the money” comes to mind, first made famous in the 1976 motion picture All the President’s Men. When an advisor makes a portfolio recommendation, be sure to ask whether the recommendation is being made as an advisor or as a broker. If the latter, the suitability standard is likely in play. Be sure to probe the advisor about fees associated with the proposed investment, both for the advisor and his or her firm, and ask about less expensive, conflict-free alternatives that might be available.

Issue 3. Opaque and Excessive Fees

Both the magnitude of fees and the lack of transparency surrounding them are a major issue across the wealth management industry. All too frequently, clients are unknowingly paying multiple layers of fees – advisory fees, fees to 3 rd -party managers, mutual fund expense ratios, transaction charges and custodian fees, to name a few – and in many cases, the fees exceed what can be justified based on the client’s asset level, the complexity of their situation, and the value provided by their advisor.

We advise asking your financial advisor to disclose your total, all-inclusive annual fees, or in the case of a prospective advisor, what they would be if you decided to work together. Additionally, since these fees will likely be quoted to you as a percentage or in basis points, make sure to translate the figure you receive into actual dollars. While something like 0.50% or 50 basis points may sound small, converting the figure into its dollar equivalent will allow you to better assess the advisor’s value based on your total out-of-pocket cost.

Issue 4. Poor Performance Reporting

Last but certainly not least, sub-par performance reporting continues to be an issue across the wealth management industry, with many advisors and firms failing to provide clients with a transparent, comprehensive view of their investment performance. Rather than offering a clear view of portfolio performance versus an accurate benchmark, many advisors will compare complex portfolios to simple or inappropriate benchmarks, leaving the client with an inaccurate view of how their assets have fared over a particular period of time.

Be sure to ask your current or potential advisor if he or she has the ability to provide you with comprehensive performance reporting. Your report should include a summary of your total portfolio return and a comparison of portfolio performance versus an asset weighted benchmark.

Doug Black is founder and a director of SpringReef Partners LLC. Before launching SpringReef, he was Head of Strategic Business Development and the Chief Operating Officer of Private Wealth Management for UBS Wealth Management.