Club selection critical in wealth management game

Millions of people work most of their lives to build the retirement savings they will need to live comfortably after they decide to quit working. In some ways, that’s the easy part. For many, the hard part is managing all the wealth they’ve accumulated.

It doesn’t matter whether they’ve saved several hundred thousand dollars or several million; people want to know their investment accounts are growing and that their money is safe. Everywhere they turn, they hear voices from the financial industry competing for attention with facts, figures, claims and promises.

In the middle of it all, retirement savers are busy with careers and families, and have little time to study all the assertions and understand the differences. And rest assured, there are differences.

You would not use a sand wedge to drive a ball down the fairway and you’re not likely to pull a 7 iron for a 10-foot putt. The financial industry is a little like a golf bag. There is a club for every purpose whether it is insurance, investing, retirement savings or a range of other services. The problem is that some of these clubs are being used for multiple purposes. Trust fund managers also set up retirement accounts, insurance companies offer IRAs and brokerage houses sell annuities. No wonder some retirement investors struggle to find the green.

The U.S. Securities and Exchange Commission had investor safety in mind when it set up regulatory structure around registered investment advisors, which are financial firms dedicated to financial management services and advice.

Under SEC rules, RIAs must hire an SEC-regulated custodian, such as Fidelity, Schwab, or Pershing, to independently ensure transactional compliance and transaction accounting on behalf of clients. To ensure independent, third-party financial reporting, these custodians also provide account and activity statements directly to the RIA’s clients. Furthermore, RIAs place their clients’ funds in the hands of the custodian, which conducts financial transactions as directed by the RIA, which has legally required approval from the client.

Under this structure, retirement savers have the best of both worlds. They have direct access to seasoned financial fiduciaries with legal responsibility to act in the best interest of clients, and they are protected by giant, multi-trillion-dollar institutions dedicated to keeping their money safe.

The RIA regulatory structure is unique in the financial industry, custom-designed for a specific purpose, just as every other club in the financial industry’s golf bag. So, when it’s time to make a decision about wealth management and retirement savings, don’t take chances. Be sure you’re swinging the right club.

From stormy weather to calmer seas

“A smooth sea never made a skilled sailor.”

My wife shared the old English proverb with me earlier this year after a particularly challenging day at the office. As chief executive of Full Sail Capital, I’ve seen plenty of challenging days at the office this year, so Kim’s words were particularly meaningful.

The smooth sea adage became famous after President Franklin D. Roosevelt used it to close one of his fireside chats during the Great Depression. That was a difficult time in American history, much like the pandemic of 2020, when businesses failed, unemployment soared, and financial markets plummeted.

While the turmoil is not over, we have plenty to be thankful for this year as we watch multiple vaccines against the coronavirus being launched and development of medical treatments for those infected. Financial markets have broken back into record territory, and businesses are looking ahead to better times.

As investors, we can breathe a sigh of relief after a year that has tested the tenacity of many seasoned veterans. Those of us who have maintained discipline and stood our ground can take satisfaction in weathering a financial hurricane, while those who jumped ship may still be trying to make their way back to shore.

Financial downturns happen, and there is nothing we can do to prevent them. What separates successful investors from those who do not survive is the resolve we bring to the market.

Consider the different ways that cows and bison cope with storms that roll across the prairie. When cattle see storms approach, their instinct is to run away from them, prolonging the suffering as they gallop in the same direction as the rain, thunder, and lightning. Bison, on the other hand, run into storms, minimizing the danger by emerging from the back side much sooner than the hapless cows. The phenomenon illustrates a valuable lesson.

Through my 30-year career of managing clients’ wealth, I have seen many uncertain times and negative economic events, and I have learned that it is always better to move into the storm rather than stop moving, ride it out, or run away. The famous quote by Winston Churchill always rings in my head, “If you are going to go through hell, keep going.” In other words, move!

This COVID-19 crisis has been no different. Overnight, our high-flying economy was pulled to the ground, and Full Sail Capital’s entire staff was forced to work from home with their laptops, cloud connections and smartphones. As bad as the market seemed at the time, we did not run or take cover. We knew the storm would eventually pass, so we responded to the circumstances, reminding clients of the importance of discipline and diversification, and provided information they needed to make informed decisions.

While there were impulses to pull out of the market and come back when the pandemic was over, we encouraged clients to be patient because the turnaround was coming, and there would be more opportunities to create wealth in the market than on the sidelines.

When you are an investor, financial storms are inevitable, and some can seem unbearable, no matter how many you have weathered in the past. But it is important to remember that storms end, markets return, and wealth is created for those who stay the long-term course.

Smoother seas are always over the horizon.

Shopping for the right financial adviser is not always easy

Most people spend decades saving and accumulating the wealth they need for their retirement. They often start with an IRA or a 401(k), and while the savings may start small, it can grow to be worth hundreds of thousands of dollars and even more.

When people get to that point, it can be exciting, but it can also be a perplexing fork in the road. As their wealth accumulates, investors realize there is even greater potential for larger gains as well as larger losses. Decisions surrounding money management become even more important, which brings us back to that fork in the road.

Some people manage their own investments through online brokerage houses with minimal fees as well as minimal advice and guidance. Others turn to financial advisers who meet with clients and customize portfolios and financial plans to fit individual needs.

The choice may seem simple, but choosing the right financial adviser isn’t always easy. There are different kinds of financial advisers, and most have no obligation to put their clients’ interests ahead of their own. In fact, the title “financial adviser” does not tell you much. When selecting an adviser, it’s important to look deeper into qualifications and affiliations.

A registered investment adviser, or RIA, has a legal duty to act as a fiduciary. That’s a technical way of saying the adviser must act in the client’s best interest. Less than 10% of the 300,000 financial advisers across the United States are fiduciaries, and within that small group of fiduciaries, more than 90% of them are “dually registered.” That means they’re only required to serve as your fiduciary some of the time.

In contrast, financial advisers who are registered exclusively as RIAs must act as your fiduciary all the time by disclosing conflicts of interest and disclosing all fees and expenses in writing.

Unfortunately, fiduciaries that are not dually registered can be hard to find. When engaging in a search for a financial adviser, remember that RIAs must make annual filings via a “Form ADV.” This filing provides prospective clients with tremendous detail and information about any RIA firm they are considering. For more on that, go to: https://www.sec.gov/fast-answers/answersformadvhtm.html.

Other financial advisers, such as broker-dealers, wire houses and insurance agents, are only required to fulfill a “suitability” obligation. They must provide suitable recommendations, but they don’t have to put their clients’ interests ahead of their own.

So how do you protect yourself? It’s important to meet with multiple advisers, and if they say they’re a fiduciary, ask if they’ll put it in writing, and then ask them a few key questions, such as:

Does anyone else pay them to advise their clients? If so, do they earn more to recommend certain products or services?

Do they participate in any sales contests or award programs that create incentives to sell a product?

Will they present your investment performance to you net of all your fees and expenses?

Can they tell you about their conflicts of interest, orally and in writing?

Do they earn fees for referring clients to specialists like insurance agents, estate planning attorneys and CPAs?

Ask these questions, and you’ll find out who you’re dealing with, especially when you ask them to put it in writing.

David T. Stanley is the chief executive officer and a founding principal of Full Sail Capital, an SEC registered investment adviser located in Oklahoma City. The firm is composed of financial advisers registered under the SEC as fiduciaries.