It's Your Money. Who Can You Trust With It?
BY Elle Kaplan
Not all investment advisors are created equal. Here's what you need to know -- before you cash out.
As an entrepreneur, you have spent years working 24/7, as everything from janitor to CEO. For many, the day will one day arrive when you sell your business and cash in on all that hard work. Then what?
Prior to the sale of your company, you put together a game plan and a team of experts. Hopefully, that included a top-notch lawyer, accountant and financial advisor. Choosing a financial advisor you can trust is critical, but it can be tough to tell the good from the good-on-paper. A few simple questions will keep your hard-earned nest egg safe.
As you will see, I have very strong opinions about this--but after a decade-long career on Wall Street before founding Lexion Capital, I believe they’re well-earned.
Question 1: Do you have a series 7?
If the answer is yes, this person is paid on a commission schedule. Regardless of their title, they are technically a broker. So, if a bank president has a Series 7 license, please know that they are compensated, in part, by making commissions (often creatively re-titled “bonus money”) on your account.
Brokers are held to a lower suitability standard and don’t (Repeat: Do Not!) have to act in your best interests. They can push products based on what’s best for their bottom line - not what’s best for you. So, who does act in your best interest? A fiduciary. A firm held to the fiduciary standard is legally required to sit on the same side of the table as their clients. Ironically, most money managers call themselves fiduciaries, yet are legally brokers. Make sure to ask about their license: A fiduciary has a Series 65 license and turns in any Series 7 license they may have held.
I founded Lexion Capital as a fiduciary-level firm after a decade working at large and mid-sized broker dealers and investment banks. It would have been easier, cheaper, and faster to set up my firm as a broker, but it is completely antithetical to my goals and my vision of how I want to operate.
As fiduciaries, we put our money, and our legal culpability, in line with our ethics: honest, client-centric wealth management is not only our mission, it is written into the legal framework of everything we do. I hope all of Wall Street will one day operate this way. In the U.S., the largest pools of money--large foundations and endowments--are always managed at the fiduciary level. Unfortunately, this is not yet the case for most individuals.
Question 2: Is your advisor independent and separate from your custodian?
The parties who can trade your assets should always be independent and separate from the parties who actually house your money. The only person who should have control of every piece of your financial puzzle is you! That way, you are protected by a system of checks and balances.
The money manager can trade in the account but cannot move or remove money. You also get two sets of statements--one from the custodian, and one from the independent advisor. If every financial advisor were set up this way, the Madoff scheme and the more recent MF Global implosion would not have resulted in client money going missing.
Question 3: Do you sell self-branded mutual funds, or self-branded anything?
If so, keep looking. Large brokerage firms and banks have pre-approved lists of investments to sell. They have all sorts of reasons for pushing certain products, but “because they are best for clients” doesn’t top that list. You want an independent advisor who is beholden to no one but you, the client. An independent firm can pick and choose from all available investment opportunities so that you have access to the best.
This tutorial is not meant to scare anyone off from seeking the help of a financial advisor--just the opposite. Short of starting another business, investing is the only way for your wealth to grow and to generate more wealth. You worked hard to earn every dollar you’ve made from your business. Shouldn’t those dollars be positioned to work just as hard for you?