Second Opinion on Investment Advice

A client recently asked me to provide a second opinion on the investment advice he had been receiving about his brokerage (taxable) and retirement accounts. He felt the 1.0% fee was high and he didn’t know what questions to ask to determine if the portfolio’s performance justified the fee.

I was happy to help. I view second opinions very much in the same vein as a medical second opinion. By conferring with multiple independent professionals, the client should fully understand and be comfortable with the recommended course of action. The client is in a much better position to move forward if independent professionals recommend a similar investment strategy.

But the story has taken an unexpected turn that has not yet concluded but is worth telling to this point.

Contours of a Second Opinion

In a typical second opinion scenario I seek to understand the client’s investment horizon (when they will need the money) and their risk tolerance (can they take the market ups and downs). I then assess each account’s asset allocation (the split between stock and bonds) and I analyze the securities’ (e.g, the mutual funds) performance compared to widely available benchmarks of low-cost index funds.

I also obtain the other advisor’s registration statement (often called the brochure). Registered Investment Advisors (RIAs) are required to provide clients and potential clients with their brochure at the start of any advisory relationship and annually with any updates. These statements are filed with the SEC and/or state securities regulators and are publicly available.

The registration statement is called “Form ADV.” My form ADV can be found here.  Form ADV has two parts:

  • Part 1 contains information about the adviser’s business and whether the adviser has had problems with regulators or clients.
  • Part 2 sets out the minimum requirements for a written disclosure statement, commonly referred to as the “brochure.” The brochure describes, in a narrative format, the adviser’s business practices, fees, conflicts of interest, and disciplinary information.

I went to the advisor’s website and didn’t see the brochure. I used the SEC’s investor information website and searched for their Part 2 brochure. This particular advisor worked under a brokerage that had seven (7) different brochures. I read through many of them. They described and disclosed different practices depending upon the product/advice provided to the client and many of the services described seemed to pertain to my client. I thought I would just ask the advisor which brochure governs the relationship.

My main interest was to learn how the advisor chose the funds that were on the investment platform. I wanted to see if there were revenue sharing agreements in place that favored certain mutual funds or other securities. I also wanted to see the types of analysis or simulations/hypotheticals they performed to determine which funds and asset mix were the best for the client.

Back to the Story

We set up a call with the advisor to ask several questions, but mainly to get the brochure. The client had set it up several days earlier so our joint call wasn’t out of the blue.

After the requisite introductions, I explained how I had examined several of the brokerage’s brochures and different advisory products. I asked the advisor which one pertained to the client. Her response was, “Good luck finding that.” Not the response I expected. She elaborated that they really weren’t aligned with brokerage but only used their securities platform.

I reiterated that we would like to see the brochure to fully understand the fees/incentives under which she was operating. “You are first person to ask for the brochure.” Again, not the response I expected.

I wanted to hear, “Yes, of course, I’ll get it to you right away, since it is my obligation to provide it to the client annually!!!”

She then suggested that she provide an analysis of the client’s financial situation and portfolio using their software package. I again said that was nice and we’d welcome having it, but I’d still like to see the brochure.

After several minutes of questioning my credentials and digging into why I would ask for such an item, we ended the call. The client followed back up and said we were looking forward to getting the brochure and the promised analysis.

Two Takeaways from this Second Opinion So Far

1. Second Opinions are Tough. It is very uncomfortable for someone to be second-guessed. But it is necessary and should become standard practice especially if the client seeks one.

Instead the advisor’s response was to belittle the request, change the subject, and attack the messenger. Not a recipe for a fruitful encounter.

I wish she had said, “I’d be happy to help to make sure the client gets the best investment advice possible. We can showcase the brilliant work we’ve done on his behalf. In fact, we don’t think it could have been done any better and here is the back up to prove it.”

2. Whose Interest Does the Advisor Serve? I am reminded of a story one of my early clients told me about the professionals she had worked with over the years. She made a point that stuck with me ever since.  In her experience, each professional she engaged with looked at her situation and saw how they could maximize the situation to their benefit – not to serve her better. She explained that without knowledge in so many areas (divorce law, insurance coverage, car repair, investments, etc.) she got the short end of the stick and the professional walked away with a full wallet.

It should be the opposite way.

We as professionals should seek to be as transparent as possible and to provide services that put the client’s interest first with no conflicts, perceived or actual, to the contrary.

In this situation, I am outraged that we were met with such an obstinate response. The advisor seemed to be insulted that after the client had paid substantial fees over the course of several years, he would dare ask for a second opinion or for even the basic disclosures that are required by law. Outrageous.

This interaction happened on Thursday April 28th. As I publish this blog on Thursday, May 5th we still haven’t received the brochure. I am not sure if they are hiding something or have fallen down in their compliance. Either way my antenna are up for potential problems. Where there is smoke there is fire. Stay tuned for more on this second opinion!


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