The Seven Attributes of a Values-Aligned Advisor

Invest for Better is launching a series of blog posts about the important topic of finding and working with financial or investment advisors.  We are excited to share this first post, excerpted from Janine Firpo’s forthcoming book, Activate Your Money: Invest to Grow Your Values and Build A Better World (Wiley 2021).  It recommends key characteristics of an advisor who will put your values and interests first.

 

When you’re deciding to stay with your current advisor or to hire a new one, there are seven attributes that will help you determine whether they — and their firm — have your best interests at heart. These attributes will help you determine if they’re committed to values-aligned investing and whether they adhere to an investment philosophy that resonates with you or not. These attributes are as follows.

1. Values-alignment is a tenet of their investment philosophy.

 When I was younger, I thought all financial advisors believed pretty much the same thing. I was in my early 30s, the first time I talked to a finance expert. Since I didn’t have enough money to warrant an advisor of my own, I spoke to my mother’s advisor. He met with me, on occasion, as a favor to her. At the time, I pretty much believed whatever he told me.

Since then, I’ve learned that advisors have their own investment philosophies as well as their own beliefs about asset allocations, preferred investment vehicles, and impact. Recognizing an advisor’s point of view and biases is critical in choosing someone who’s going to be a good match for you. In fact, I think it’s one of the most important elements of a strong advisor-client relationship. A deep commitment to achieve both financial and social return should be a core tenet of an impact advisor’s investment approach.

One way to uncover an advisor’s philosophy is to gain some understanding of your own. You might want to spend some time examining your own beliefs about investing. For example, are you wary of the stock market, or do you embrace it? Do you have an opinion about the relative value of active versus passive funds? Do you have strong beliefs about specific impacts you want to make with your money? Are you excited by the thought of investing in private deals and other alternatives, or does the idea scare you? And do you want philanthropy to be integrated into your investment landscape?

If you don’t know the answers to these questions or have an investment philosophy of your own yet, don’t worry. These are questions you can revisit as you learn. They’ll become clearer over time. You can use the process of interviewing prospective advisors as an opportunity to listen to different perspectives, gain more knowledge, and further your own views. 

2. They are a fiduciary.

 Almost half of Americans believe that all financial advisors are legally obligated to act in their client’s best interest.^[i] However, that isn’t true. Different types of advisors have varying levels of obligation to you. Advisors that are fiduciaries have a legal and ethical responsibility to prioritize your interests over their own or their firms. Regardless of the type of advisor you select, confirm they are a fiduciary.

Registered Investment Advisors (RIAs), one of the most highly regulated types of financial advisors, are bound by law to be fiduciaries. And most, if not all, robo-advisors are registered as RIAs.

3. They don’t receive commissions.

 Broker-dealers are another type of financial advisor. Also referred to as brokers or stockbrokers, they can provide investment advice to clients just like RIAs. However, they also promote and sell financial products they receive a commission on. In June 2020, the Securities and Exchange Commission (SEC) enforced new reforms that require brokers to perform in the “best interest” of their clients. This new requirement brings brokers closer to the fiduciary role of RIAs. Today, if a broker offers you an investment they receive a commission on, they have to disclose the commission they will be paid as well as any conflict of interest.

An advisor can be both an RIA and a broker-dealer. Before you hire an advisor, ask whether they are affiliated with a broker-deal or could receive commissions as a result of their relationship with you. If an advisor can receive commissions, spend some time considering why they would be preferable to an advisor who only works on your behalf. 

4. They offer the core and values-aligned financial services you want.

 In addition to their core services, a values-aligned advisor should also be able to discuss the selection criteria or impact lenses they will apply to their investment decisions. They should be able to talk to you about how they’ll report on the impact your investments are having and be able to show you sample reports. You should also learn the extent to which they engage in shareholder advocacy as well as what will happen to your proxies. 

5. They are open to a nondiscretionary relationship.

In a discretionary relationship, you give your advisor the legal ability to buy and sell investments on your behalf without asking you first. In a nondiscretionary relationship, your advisor will suggest investments to you, but you have to approve those recommendations before securities are purchased.

While a nondiscretionary approach provides you with more control, it will take more of your time. It requires you to be more educated about asset allocations, portfolio strategies, and investment options. If you’re willing to commit the time, a nondiscretionary relationship can provide a wonderful opportunity for learning, especially if you choose a financial advisor that takes your education seriously and considers it a part of their job. At this point, most of my assets are self-managed or nondiscretionary. However, I have given discretionary power to the manager of a separately managed public equities account I’m invested in, because she trades more frequently than I want to be involved and I trust her decisions.

While you may provide discretion to your advisor to buy and sell securities on your behalf, they should not have the ability to withdraw your money from your accounts. So, when you are interviewing an advisor, confirm that your money will be held with a third-party custodian, like Fidelity, Vanguard, or Schwab.

6. Their fees are fair and follow industry standards. 

You should pay either a flat fee for service or a percentage of the assets an advisor is managing on your behalf. Percentage fees tend to be deducted directly from your account and are often on a sliding scale: The higher the investment, the lower the fee. An advisor might charge 1.25% to manage assets of $500,000 or less, then drop to 1.0% for assets of $501,000 or more, dropping again to 0.090% after the first million invested, and so on.

Don’t assume the only fees you are paying are the fees you pay your financial advisor. Most likely you’ll pay additional fees for any funds, private investments, or other assets your advisor is managing. These fees can be quite low, as is the case of index funds (0.15% or less), or quite high (1.5% or more) in the case of actively managed accounts or private investments. It’s good to know all the fees you pay on your investments, because what you don’t know could hurt your returns.

7. Their approach to working with you is clear.

 The last attribute relates to the process an advisor will use to work with you. An advisor should be able to explain how they will develop their relationship with you as well as share a complete roster of their services, including what you can expect in the earlier phases of your engagement as well as what happens over time.

^[i] https://view.ceros.com/personal-capital/2019-financial-trust-survey-mobile/p/1