Guest Blog Post by Christopher Girbés-Pierce CFP®
People pay their financial advisors to manage their money, write up blueprints for their financial plans, and generally dole out wise advice to help them achieve their goals. What they don't want is for them to take risks they're not comfortable with.
Not everyone has the deep fascination with finance that drives most financial professionals to choose their careers. The finer complexities of the financial world are above and beyond what most people have time to master, and the intricacies of investing for the long haul amidst a changing market are well beyond what most of people's stress levels can handle.
But that's why people pay financial advisors to help them. They rely on financial advisors of all types - financial planners, investment advisors, money managers, retirement specialists and more - to advise them and guide them to make the right decisions. Or, they simply trust the advisors to handle everything ... even the decisions.
For people who rely on a professional to invest their money for them, risk is a huge concern.
What About Investments That Are Too Risky For Your Liking?
You may love the feeling of leaving everything up to your financial advisor, but what if he or she is investing in products most people (including yourself) would find incredibly risky?
How would you even know?
You could ask, of course, but "risky" is a relative term. Anyone could argue that any investment is relatively safe, if they compared it to the most obviously risky investment on earth. Or anyone could argue that "all investments are risky, silly!"
But there is actually a standard of risk that's deemed acceptable, and only a fiduciary will stay within the bounds of that standard.
A Fiduciary is Obligated to Tell You About Unusual Risk
A fiduciary, who by definition has taken an oath to put your own interests above her own, is obligated to tell you about any unusual risk involved in your financial plan, investments, or strategies.
Financial advisors who are also fiduciaries are bound to serve your best interests. And warning you about unusual risk definitely falls into that category.
Registered Investment Advisors Will Tell You Everything About the Risk in Your Portfolio
"Registered Investment Advisors" (RIA) are fiduciaries who are bound by The Investment Advisers Act of 1940. This stipulates not only that they must act in your best financial interests, but that they must also be totally transparent about the amount of risk they're taking with your money.
Any RIA who manages more than $25 million for their total number of clients must register with the Securities Exchange Commission (SEC) (hence the term "registered" in their professional titles).
They are also required to file paperwork with the SEC regarding their investment choices for their clients. This includes information on unusual risk.
So, if the amount of risk in your portfolio has you up at night with worry, you might want to switch over to a financial professional who holds to the fiduciary standard. And keep in mind, an RIA is registered with the SEC and must make disclosures about just the thing that keeps you up at night: unusual risk. If you're now considering searching for a new financial advisor, these are the facts that could help you make the right choice.
Christopher Girbés-Pierce CFP® is the Founder of Enlightened Wealth Management, a fee-only wealth management firm located in Santa Monica, CA. EWM specializes in providing comprehensive financial life planning services for clients who wish to align their financial resources with their goals and values.
Christopher and I became friends after meeting at an industry conference, and I asked him to write some thoughts as a guest topic for this site.