Integrity, Trustworthiness and Your Best Interest Matters when considering a Financial Advisor

By Bob Peters || Feburary 1, 2023

Integrity will define how the world sees you…and your Financial Advisor

Integrity is the practice of being honest and showing a consistent and uncompromising adherence to strong moral and ethical principles and values. In ethics, integrity is regarded as the honesty and truthfulness or accuracy of one’s actions.

The quality of being honest and having strong moral principles; moral uprightness.

Trust

It’s easy to take for granted the word Trust, but when you stop and ponder the word, Trust begins to take on a much deeper meaning. What if you knew that the person you trusted only cared about your best interest?  He/she did not seek financial gain or emotional ascendance.  They had no motive other than serving your best interest.  You would not expect that they would be “all knowing” but you would have no doubt that their words and deeds were sincere and always given in the spirit of goodwill.  Having confidence and conviction that this person was always on your side, you would not be defensive when they raised what might be a prickly subject.  Trust is a very powerful and rewarding gift to give and receive.

Trust is fragile…treat it so

Trust is fragile.  Trust takes a long time to build.  There is no shortcut because we need a lot of interactions to begin to feel it.  Yep, I believe it’s one of those things that you feel.  Trust is built after many circumstances where your character, compassion, and honesty are felt by the other person and when it comes together it’s a magical place to be.  It’s always two-sided.  Both people need to get to the same place, otherwise the magic is not there.  Ultimate trust, that I just described, is like summiting a mountain.  You can have many hikes with many good people with whom you have a degree of trust, but hiking to the summit is a completely different feeling.  Trust if fragile…treat it so.

Able to be relied on as honest or truthful

A definition of trustworthy, “Able to be relied on as honest or truthful”.  Trust is not about being perfect or achieving accomplishments.  It’s about being honest and truthful.

What does Trust and Character mean to you?

It’s a good question to think about.  What does Trust and Character mean to you?  On the surface it seems ridiculous to ask the question, but I think it’s worthy of longer reflection and believe that it’s not necessarily as an obvious answer as it might seem.  Let’s take a look at a couple of What If’s:

 What If… 

• Your best friend said that they would keep a secret, but you found out that they did not?
• Your boyfriend/girlfriend said that they could not meet for a date because they were too busy or tired and you later found out that they met a friend instead?
• You told your friend about a dream job that you had arranged for an interview when you got back from a trip and found out that your friend used your contact to get an interview and the job you wanted?
• You were in a business partnership and your partner was dishonest with you?
• What if you were told to believe something from someone you respected and later found out that that person had told a lie?

There are an infinite number of What If’s.  You choose who you want to be…a person who can be trustworthy or someone who is not and tries to get away lying without others finding out.

The Five “C’s” of Credit; let’s go to Character

For about 36 years I earned my living as a banker providing capital (debt and equity) to help small, medium and large size businesses grow their employee base, provide more products and services to their customers and invest back into their communities with dollars and volunteerism.  As a young credit analyst, you learn the “Five C’s” of Credit: Character, Capacity, Capital, Collateral and Conditions. Every one of the Five C’s is important but none more than Character.  Character comes first because if all of the other “C’s” are acceptable, but the borrower lacks Character, your manager would expect you to turn down the loan request…period.  You may support extending the loan without one of the other four C’s but never without Character.

I had a long career working with business owners in good and bad times and I have no doubt that Character is the most important of the Five “C’s”.  When businesses go through stress and the owners’/decision makers are facing very difficult circumstances their Character, or lack thereof, shines brightly. 

Cheating at Golf and Marriage

A common refrain in my banking days was, “if they cheat at golf or in their marriage, they will cheat on their bank.”  For a large part of my career, I was expected to grow existing business relationships and add new relationships.  Over my career I have experienced significant financial and economic environments that put great stress on people and businesses and have come to appreciate and admire the tenacity of entrepreneurs.  Starting and growing a business takes a tremendous drive, conviction and optimism.  There can be great success, but there are also businesses that struggle and fail.  Failure comes from many different directions; the lack of sufficient capital to sustain a business through the high growth phase, competition, macro-economic conditions, the inability of management to adapt to changes in the marketplace, etc.

As you may recall from the Bill Ackman video, a business that borrows money has a contractual arrangement to repay the borrowed funds on the agreed upon terms and all residual amounts are left for the shareholders.  In exchange for the preferential contractual agreement, the lender receives an agreed interest rate.  In contrast, the shareholders have a residual (or last) claim on the assets of the business and are therefore able to enjoy the possibility of unlimited returns.  When businesses struggle and the owners are facing a decision whether to lay off workers, sell parts of their business in order to satisfy their contractual lender obligations, it becomes very stressful.  During these times of stress, the rubber meets the road and character shines brightly.

Confusing Honesty, Manners and Communication

Parents (me included) probably are early to blame when it comes to unintentionally creating confusion around honesty and good manners with their kids.  We may tell our kids that it is good manners to show appreciation for a meal regardless of how they “liked” the meal.  We may have done this to instill the value of appreciation…well intended, but we may have overlooked the need to teach communication skills.  How to teach the ability to convey appreciation without a “white” lie is the better parenting lesson.

Do your best to be the most trustworthy person you can be.  Your significant other, spouse, family member, employer, co-workers and friends will admire this quality. 

How does Trust work in the realm of Financial Literacy?

I was talking with a friend of mine the other day who I first met 42 years ago.  She was interested in learning more about investing and financial matters in general.  Where do you start?  What level of “financial literacy” is a nice to have vs. a need to have?  What are the trusted sources someone should turn to for financial assistance?  Who should I trust?  I may trust someone to help me but what if they are not competent and unintentionally give me bad advice?  Should I trust, or not, someone who has a real or perceived conflict of interest where my best interest is in conflict with the person giving advice?

Conflicts of Interest

In my career I was held accountable to written ethical standards where I was subject to disciplinary action, up to termination if I violated these standards.  I was responsible to select businesses in which to lend money (aka extend risk) with the expectation that they would repay these loans in full allowing the bank to realize a profit.  A possible conflict of interest would be evidenced by the company (my customer) giving me personally something of value (money, a gift or something else of “value”).  By accepting something of value it could perceived that my decision to extend credit was inappropriately influenced by the fact that I received a gift.  Where is the line drawn to define an acceptable gift vs. an unacceptable gift?  Is a cup of coffee ok?  How about dinner?  How about dinner with very expensive wine?  How about a ride on a private jet to an exotic location to have a three day “business retreat”?

Real vs. Perceived Conflicts of Interest

What is the difference between a real vs. perceived conflict of interest?  I had customers which were publicly traded businesses and in my capacity as their banker, I was in possession of confidential, non-public information.  The fact that I had non-public information gave me an advantage vs. other investors, and had I bought or sold the company stock, it would clearly be a real conflict of interest…and a violation of insider trading laws, which is a felony.  This is an example of a real conflict of interest.  How about this one:  Jane and I work in offices next to each other and Jane has non-public information about a public company which I do not have.  A reasonable person might perceive that I may have a conflict of interest because I had the ability to obtain it by walking into her office, or accessing it from a common server.  The higher standard, and one which I highly recommend you adopt in your life, is to avoid both real AND perceived conflicts of interest.

Financial Advisors and your Best Interest?

In the wealth management world aka Financial Advisors, the rules under which they are held responsible can be a bit confusing for clients to understand such as the difference between “suitability” vs. “best interest”.  If you use the term Financial Advisor you are required to abide by rules such as Regulation Best Interest which include certain obligations covering Recommendations, Disclosure, Conflicts of Interest, and Care and Compliance.  However, when these rules apply to a person, using the term Financial Advisor is not necessarily universal.  I’ve put a link to the FAQ’s of Regulation Best Interest, but I think you will see that it is complicated.

So, let me suggest that should you ever consider working with a Financial Advisor you first ask yourself a basic question:  Why would you want to compensate someone for advice if they did not always have your best interest at heart?  If the terms of your Financial Advisor’s “agreement” do not stipulate that he/she will always operate in your best interest, I might suggest you give this one a long pause.

When do I need a Financial Advisor and how do I pay them?

There is no math equation or check list that spits out an answer whether or not you would benefit from hiring a Financial Advisor. To a degree it depends on how you choose to invest, your financial literacy, the propensity to understand your personal risk appetite, and your behavioral self-control.  The size of your personal balance sheet and the complexity of your circumstances will be relevant factors.  Do you have knowledgeable and trusted friends and family members to help you answer questions?

I absolutely believe it’s possible for most people to acquire sufficient financial literacy to go through life without needing to hire a Financial Advisor, but the ultimate answer is up to you.  One of the missions of this blog is to get your knowledge and confidence to a higher level so you can better assess this question.

Paying a Financial Advisor

As for how Financial Advisors get paid…generally one of two ways:  1) a percentage of assets that they are “managing” or 2) an hourly fee.  Many Financial Advisors who charge a fee based on the assets under management require a minimum amount of assets before they would consider taking you on as a client.  These firms typically have fees that decline as a percentage as your assets grow.  Some firms may offer more services if you have more assets under management…you may or may not need or want these services.  The Financial Advisors that charge by the hour is pretty straight forward.  They do not receive compensation for other than the time they spend with you.

While there are honorable and trusted Financial Advisors who get paid using the “asset under management” model I do really like the benefits of going with a reputable Fee-Only Financial Advisor if you decide that an advisor gives you the value you are seeking.

Develop a Financial Plan

This blog is geared for young folks who are getting started in their adult life and, in my opinion, are generally a long way away from needing or wanting to pay for the services of a Financial Advisor.   You can do this yourself if you acquire a basic level of financial literacy and adopt a simple investment philosophy by selecting a few low cost exchange traded funds and sticking with them in good times and bad.

Notwithstanding the above, a very important service that you should expect from any Financial Advisor is for them to assess your current circumstances and future goals and develop a Financial Plan that helps you achieve that end.  You, not your advisor, need to determine your goals.  Your goals are based on your values.  Do you highly value travel, hobbies, education for your children, owning vs. renting, financial independence at a particular age, charity, pursuit of volunteerism or lower paid work where you have a passion, marriage, etc.?  As you answer these questions, it becomes much easier to assign future costs which are included in your financial plan.  I’ll leave it there for now, but we can come back and talk more about elements of a financial plan later.  Do good, be good.