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Doveryai, No Proveryai

If you know this expression you win the useless knowledge award of the day.  It is Russian for “trust, but verify.”  The story is Ronald Reagan learned it years ago from a Russian writer and he used it often when discussing US relations with the former Soviet Union.  I was thinking of it with the implementation of the new fiduciary rule and how investors still need to be diligent when working with a financial advisor.


The new fiduciary rule went into effect last week.  The simple explanation is advisors must put their client’s interests first in retirement accounts.  While this is a good start it is by no means a cure-all for investors who now think they no longer have to verify their advisors are truly working in the client’s interest.  There was a great article on Bloomberg last week titled – “Why You Still Can’t Trust Your Financial Advisor.”  I thought I would share some of the items that caught my eye.

  • At the average firm, 8% of advisors have a record of serious misconduct. Most them stay employed at either their current firm or move to another one.
  • More than 15% of advisors at some of the larger firms have black marks.
  • The presence of certain investments in your portfolio can reveal if you are getting conflicted advice. Non-traded REITs (Real Estate Investment Trusts) on average have fees of over 13% while their returns are half of traded REITs, which are much easier to buy and sell.
  • There is a complex product called a “reverse-convertible” out there. When banks create these they offer two different versions.  One version offers a higher yield and a lower payout to the advisor.  The other is the opposite with a lower yield and a higher payout.  Customers bought 10 times as many of the lower yield product which just happened to pay the advisor more.
  • More than half of people 60 years and older either believe their financial advice is free or are unsure of what they pay.
  • Nearly 60% of investment executives agreed that “clients are often sold inappropriate financial products.”


These are just a few of the eye-catching facts that came out of this article.  One of the big questions of the new fiduciary rule is how long it will stay in effect.  While the Comey hearings were going on last week the House of Representatives passed a bill titled the Financial Choice Act.  Some of the contents are to scrap the Volcker Rule (which prohibits banks from using taxpayer-backed deposits to make risky bets), to revoke the fiduciary rule, and to neuter the Consumer Financial Protection Bureau.


I met with some new clients last week.  When doing their research for a new advisor they did two of the smartest things I believe every investor should do.  First, they reviewed my ADV.  As I explain, an ADV is basically a governing document explaining what I do, what I charge clients, how I am paid, and more.  Reviewing your advisor’s ADV is so important I put mine right on my website.  Next, they went to FINRA’s BrokerCheck website.  Here is where you can see what licenses your advisor has, how long they have been in the business, where they are registered and if there are any complaints about the advisor.


Again, having the fiduciary rule in place is a great step for protecting clients.  It is estimated not having this rule costs investors $17 billion annually, and over $700 million of this is in Ohio alone.  Unfortunately, the fiduciary rule will only cover roughly 1/8 of the financial wealth Americans control and it is under constant attack by the same industry which half of the executives feel clients are sold inappropriate products.  So, while this is a step in the right direction the responsibility to make the right decisions when it comes to choosing your financial advisor is up to you.  It is now time for you to “trust, but verify.”

About Dan Johnson, CFP

I am the President and CCO of Forward Thinking Wealth Management, LLC, which is the flat-fee financial planning firm located in Akron, OH, and set up to work virtually with clients across the country. I charge clients a flat fee of $4,800 regardless of asset size. My firm is a solution to what I feel is a broken system where clients pay advisors based on something out of their control - the performance of the market.
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