Do I Want To Give My Financial Advisor Discretion on My Account?

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In order to safeguard your assets, we recommend that a third-party custodian and not your financial advisor maintain custody of your assets. Having a financial advisor who does not have custody of your assets gives you an extra layer of accountability and oversight. As a result of this recommendation, Marotta Wealth Management does not maintain actual custody of the assets we manage.

Instead, to implement our trading recommendations, we add our discretionary authority to accounts hosted at qualified custodians. In these discretionary accounts, we take responsibility for the purchase and sale of investments by making trades on your behalf based on your approved investment policy statement.

Having a financial advisor who has discretion over your accounts is only a good idea if your financial advisor is covered under the fiduciary duty and is fee-only. Advisors who are not required to meet the fiduciary duty or who may receive commissions, kickbacks, or other compensation based on their investment purchases should not be given discretion to trade on their own in your accounts.

In fact, non-fiduciary advisors are likely not helpful advisors at all as under oath many admit they are merely financial product salesmen.

Most investors are not aware of this critical division of professionals in the world of financial services. This distinction lies between fee-only fiduciaries who are obligated to act in your best interest and commission-based agents and brokers who are required to act in the best interest of the companies that employ them. Between the two are fee-and-commission fiduciaries (often misleadingly called fee-based) which make things even more complex.

Even when people have some inkling about the differences, several important misconceptions persist about both the nature of the problem and an adequate solution.

Although any person who acts as an executor or as a trustee or under a power of attorney is considered a fiduciary, the SEC is allowing many financial professionals to hide in a lower legal requirement, not meet a fiduciary standard, and call it “Best Interest.” The SEC states plainly, “We have declined to subject broker-dealers to a wholesale and complete application of the existing fiduciary standard under the Advisers Act because it is not appropriately tailored to the structure and characteristics of the broker-dealer business model (i.e., transaction-specific recommendations and compensation).” In other words, the way commission-based agents make their money stands in opposition to acting in your best interest. A broker-dealer’s relationship with a client stems from a sales-like transaction, and their regulation requires no ongoing responsibilities.

In contrast, being a fiduciary requires ongoing responsibilities. Fiduciaries are bound by a code of ethics. They take oaths. Their conduct is based on applying ethical principles. A fiduciary is held to the highest legal and ethical standards for the property entrusted to his or her care and has a legal obligation to act in a client’s best interest.

We take the fiduciary responsibility very seriously. It is at the core of our identity. It is the heart of our tenets of customer service. In fact, we have made the fiduciary standard our mission statement: “Our goal is to help our clients meet theirs.”

What is more we are fee-only. Fee-only means that we have one fee that the client pays based on the amount of their investable assets. We are upfront and straightforward with our bill. Each quarter in our quarterly reporting we include a clear, itemized receipt showing precisely what was deducted from each account and the total. This total represents all that we were paid.

Some of you may not know how rare fee-only advisors are in the financial industry.

Approximately 88% of financial services professionals’ compensation includes commissions. Regardless of if they provide an invoice of what they deduct in fees, every fee-and-commission adviser, broker-dealer, or salesperson has hidden fees they collect under the table. We call these professionals “The Dark Side” of financial services. You can be a good professional on the dark side, but the temptation to be bad is strong. Your very livelihood may depend on selling clients the product that produces the largest commission. Even if you intentionally strive to ignore the commissions, your entire work environment may be based on a sales mentality. Higher cost funds may be more prominently featured. Sales quotas may be expected. Employee contests may be built around pushing more product. Within such a work environment we believe that most commission-based advisers do not even realize how much harm their compensation method does to consumers. The adviser sees only the small commission they directly receive and are unaware of the greater commissions collected by the company through many different avenues.

A commission-based professional’s incentives may be directly in opposition to yours. To increase his or her wages, he or she may need to get you to purchase products which cost you more. This method of compensation, while legal in the United States, is flat-out illegal in many other countries.

In contrast, fee-only advisors such as our firm avoid this particular conflict of interest entirely.

We get no commissions, no kickbacks, and no payments other than the client’s fee. Our fee is upfront and straightforward. Our fee is a percentage of assets under management, so it increases when your asset value increases and decreases when your asset value decreases. We believe this better aligns our incentives with yours. We have every incentive to strive to keep your fund and brokerage costs low in order to keep the returns you receive as high as possible.

Incentives matter. If you are going to get a financial advisor and delegate to them discretion over your accounts, we recommend you select a fee-only fiduciary who you can trust to put your interests first.

Photo by Evan Clark on Unsplash

Follow Megan Russell:

Chief Operating Officer, APMA®

Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. She is the author of over 700 financial articles. Her most popular post is "The Complete Guide to Your Washing Machine" while one of her favorites is "Funding a 3-Year-Old’s Roth IRA."