Who should you trust to manage your life savings? Your employer has put the job of managing your Thrift Savings Plan account, which might be the bulk of your life savings by the time you retire, squarely on your shoulders.
Unfortunately, many participants invest their trust in the wrong sources and wind up suffering the consequences. The fact is that a trusted source is not the same as a trustworthy one, and knowing the difference is critical to your financial well-being.
Before you place your trust in any investment or other financial advice, you should evaluate the source of that advice along five critical dimensions. And don’t forget to evaluate yourself before you give yourself the job!
A trustworthy investment adviser must be:
Conflict-free. Any adviser you trust should be completely free of any material conflict with your interests. This means, no product sales, incentive rewards, finders-fees, outside business interests or third-party control. Even something that appears to be an incentive to further your interest, like performance-based fees, can cause a conflict that will induce the adviser to compromise your interests for theirs. Flat fee for service, ideally fixed in advance, is the highest standard here.
Competent. You should be looking for analytic ability, not personality. A trustworthy adviser must have the knowledge and skill set necessary to properly analyze the decision at hand and use the results of that analysis to determine the course of action that will best serve your interests. In most cases, this means someone with a strong background in statistics, mathematics or quantitative analysis.
This is usually the product of an education in science or engineering.
Concerned. This one is often over-looked. Why would you trust someone to guide you who doesn’t care about whether the job gets done right, or not? A trustworthy adviser should be pro-active and become familiar with your particular goals, resources and constraints. They should come to you regularly, and at special times, to gauge your progress, chart your course going forward, and prompt you for any necessary action. An adviser who tries to do as little as you demand for their fee doesn’t deserve your trust. They must be committed to doing everything necessary to make sure that the job is done right, even if you’re not a squeaky wheel.
Accountable. This one’s easy to evaluate, but hard to find. A trustworthy adviser should accept fiduciary obligation to you, in writing, and be willing to stand accountable for the quality of their work. This means that they are licensed as a Registered Investment adviser and not as Registered Representative of a Broker Dealer or insurance agent. A trustworthy adviser will also unconditionally guarantee the quality of their service, or your money back.
Cost-effective. No advice is worth more than you can afford to spend. Also, except in unusual circumstances, you should not spend more than 1 percent of your portfolio’s value, per year, on all investment expenses, combined. These include analysis and advice, account management, sales commissions, fund management costs and transaction costs. Everything. Anything more than 1 percent per year in total investment expenses will likely do more harm than good and should be avoided.
Mike Miles is a Certified Financial Planner licensee and a principal adviser for Variplan LLC, an independent fiduciary in Ashburn, Va. Email your financial questions to firstname.lastname@example.org and view his blog at blogs.federaltimes.com/federal-money.