From the desk of Charlie McCullough
The other day I was talking to a friend about retirement planning and the importance of working with a trusted financial advisor. I told them about my relationship with the team at Financial Fiduciaries and why I thought fee-only services were valuable. As the conversation commenced, we started talking about whether or not it was a good idea to give an RIA full-discretion to make investment decisions (discretionary investment management) or if an advice based arrangement would be a better idea (with the individual making the decisions based on the advice of a broker). It was a fruitful discussion in which we came up with many pros and cons. Here are a few of the things we considered:
- Tying their hands – A non-discretionary advisor has their hands tied when they see an opportunity that requires a quick decision. If they must first obtain client approval, the opportunity could pass them by or a difficult situation could worsen. Discretionary advisors are able to take action on their recommendations which could make a real impact on the performance of the investor’s portfolio over time.
- Do you trust your Advisor? – An advisor who has discretionary rights must act within the fiduciary standard. This means that the client must have the utmost trust that the advisor will work within their best interest. Additionally, in order for this type of arrangement to be effective, the advisor must have an intimate understanding of the client’s financial goals and their current financial situation.
- Can you make a quick (educated) decision – In the end, if you do not give a trusted advisor discretionary interest in your accounts you need to take on the role yourself. How confident do you feel making quick and educated financial decisions? What would you do if the market took a turn for the worse? Do you have the free time and the market knowledge to give educated oversight to your portfolio?
- Who will profit from the decisions? – A fee-only advisor does not profit from the decisions they make on your behalf. Rather, they make their money by providing the best possible advice. If a broker does not want to take on the discretionary investment management role, perhaps they do not want to be responsible for their bad advice.
There is a lot to consider when giving your advisor discretionary responsibility of your accounts. In the end, the best advice I could give my friend was to seek a trusted professional and find out if they are a Fiduciary. This is the best protection for your portfolio and your financial future.