Have you ever had a conversation that was difficult to have? Perhaps you have a friend that has a drug issue and they need to be confronted, or maybe when your children were little you told them not to leave the fenced in backyard because something bad could happen. As an advisor, I have to have confrontational conversations just like that, but regarding peoples money. It is a tough conversation to have, but one that must be done. What I find unbelievable is when a person who is an “advisor” is more of a “Yes-Man or Woman” than a objective advisor.

A recent study by a Harvard professor, Sendhil Mullainathan, concludes that most planners actually reinforce bad investment behaviors of individuals than solve them. In his study, Mullainathan hired actors to visit 300 different planners in the Boston area in 2008. Each actor had one of four different portfolios: One group was heavily invested in index funds; another entirely in cash; a third claimed to be seeking the next hot market sector; and the fourth said they held 30% of their savings in their employer’s stock.

The result! The actors walked out of the meetings with advice that actually mimicked the biases in the original portfolios. “There is a need to get business in the door and have that client come back year after year,” says Mullainathan. “So they will avoid the difficult conversations.”

The study mostly examined commission-based planner, but there is no reason to think the same thing isn’t going on within the registered investment advisor arena. It is a horribly atrocity in the investment community. We NEED to ask the tough questions and NEED to give sometimes tough-to-swallow solutions. An Investment Advisor by definition is a fiduciary for you.

fi·du·ci·ar·y – [fi-doo-shee-er-ee] – a person to whom property or power is entrusted for the benefit of another; one often in a position of authority who obligates himself or herself to act on behalf of another (as in managing money or property) and assumes a duty to act in good faith and with care, candor, and loyalty in fulfilling the obligation: one (as an agent) having a fiduciary duty to another.

Here’s a five-point litmus test for an investment advisor:

  1. They work on a fee-only basis.
  2. They agree in writing to act in a fiduciary capacity (which means they must always act in your best interest and have no conflicts of interest).
  3. They don’t sell you any investment products or benefit financially, directly or indirectly, from their recommendations.
  4. Their investment advice focuses on your asset allocation (the division of your portfolio between stocks and bonds).
  5. To the extent they make investment recommendations, they limit such advice to ensuring that you have a globally diversified portfolio of low-cost stock and bond index funds in an asset allocation appropriate for your tolerance for risk and investment objectives.

A financial planner who tells you what you want to hear can make you feel good — but cause significant damage to your financial well-being. Just say “no” to financial planners who always say “yes.”