With my commitment to breaking the money cycles of my past, one would think a grand wealth creation plan would follow. It did not. Instead, I made an appointment to speak with a financial advisor. And what I learned is – Financial Advisors: Guilty until Proven Innocent.
We’ll get into the specifics of the conversation later. Right now, though, I want to spend some time discussing financial advisors and how I generally recommend approaching them:
THEY ARE ALL SUSPECTS!
I’m trained on the law, which holds as sacrosanct, thanks to Coffin v. United States, that a defendant is innocent until proven guilty. However, when it comes to financial advisors, I believe in the opposite. Guilty until proven innocent! Below I’ll explain why and offer three steps you can take to navigate how you approach financial advisors.
Many financial advisors are under no legal obligation to look out for you
It’s sad but true that many financial advisors, particularly broker-dealers, only have to adhere that what’s called a Suitability Obligation.
The Suitability Obligation, put forth by the Financial Industry Regulatory Authority (Rule 2111), requires broker-dealers to make recommendations that are “suitable” based on a client’s particular financial situation. This obligation, however, does not obligate the advisor to act in the client’s best interest.
What does this mean practically? It means that it is perfectly legal for this kind of financial advisor to sell you investments that are “good enough.” Broker-dealers often develop and sell these financial products to make themselves rich through commissions and fees – not you.
If financial advisors are to be approached as suspects first, then how can you ever find one that earns his or her innocence?
Only work with financial advisors held to The Fiduciary Standard
The fiduciary standard, promulgated by the U.S. Securities and Exchange Commission, requires advisors to put their client’s needs first. The advisor must provide advice that is in the best interest of the client and seek the best execution of that advice.
Advisors under the fiduciary standard are called Registered Investment Advisors (RIA). Requiring this standard of any advisor you engage should be non-negotiable.
Remember that not all advice is good advice
Even among the fiduciary standard-aligned RIAs, we need to be careful. There are wide disparities between the quality of advice advisors provide, and even between their view of themselves and reality. The Financial Planning Commission reported in a 2018 white paper that over 166,000 financial advisors referred to themselves as financial planners, but less than 65,000, or 38%, actually provided financial planning services to clients. If RIAs have this much trouble identifying the services they provide clients, it should be no surprise that their actual advice might be all over the place. This sets us all up for complexity and confusion – which are the enemies of wealth creation.
Additionally, low Black representation within the financial planning community exacerbates everything I’ve discussed. As of June 2020, there were just 1,35 Black Certified Financial Planners (CFPs) in the United States. That’s just 1.5% of all CFPs! We must therefore search high, low, backwards and forwards for advice, and be very discerning about who gets to give it to us.
Learn the basics and do it yourself
I firmly believe that knowledge is power, particularly when it comes to wealth creation. With a small investment of time (think a few hours each year), you can achieve outsized success in building wealth over the long term. Don’t let a lack of knowledge, time, or self-confidence keep you away from investing. This enables and even exacerbates the stubborn wealth gap that persists between Black and White Americans. Mellody Hobson said it best in a 2016 interview with Tom Joyner: Black investing is a full 19% lower than White investing. The stock market continues to be one of the best tools we have in our wealth generation toolkit. We owe it to ourselves and to our community to understand it and to leverage it to build wealth.