3 Questions Investors Should Ask Their Financial Professional and the Disclosure That Should Answer Them

Seeking advice is a common human behavior when facing any challenge. Starting to invest can certainly seem daunting when financial literacy isn’t commonplace, and the transition from pensions to 401(k)s puts more onus on individuals. So while it’s understandable that investors seek advice from industry professionals, many investors are unaware of the variety of ways that professionals prioritize their objectives.

When working with a financial professional, here are three questions that investors should ask that will help clarify the perspective of the advice they’re getting:

• How are you compensated?
• What am I paying you?
• What conflicts of interest could be influencing the advice you give me?

As of June 2020, the answers to all these questions should be in a disclosure called the Relationship Summary. Broker/dealers, RIAs, and dual registrants must present this document to investors when they start working together, but most firms are only doing the bare minimum to provide this important information.

Most Firms Skip the Details

In a recent paper, we analyzed a sample of Relationship Summaries and found that few firms answered all three of these questions clearly and completely. We reviewed 100 summaries from all three types of firms required to produce the disclosure and from firms with assets ranging from just over $1 million to the largest ones in the industry with nearly $1 trillion.

Understanding how firms pay their financial professionals is critical to then evaluating their conflicts of interest. Of the firms we reviewed, just 39% provided details on or examples of their compensation model and company programs (rewards programs, bonuses, profit sharing, or other compensation programs). Without this information, investors have no way to guess the scale of each type of compensation and assess how large of a conflict it creates.

Firms must inform investors if they will pay commission- or asset-based fees; however, most leave out any quantification of these fees from the Relationship Summary. RIAs were the most likely to provide at least an example of the size of the fee a client would pay, with 48% of firms we reviewed including this. Only 28% of broker/dealers and 20% of dual registrants did the same.

Even when numbers are included, the lack of a consistent standard means some firms gave minimums, other maximums, and only a few described how an investor determines where within the range they fall. The variety in specificity gives investors little ability to compare the costs of services offered by different firms.