Are you a Muppet?

(MoneyWatch) COMMENTARY By now, you've probably heard about Greg Smith, a former executive director at Goldman Sachs (GS) who resigned last month through a scathing New York Times editorial. In his critique of the investment bank, he claimed that he had seen five different managing directors refer to their own clients as "Muppets." Smith also said the firm's culture had changed during his nearly 12 years at the company from one that looked out for clients to one that seemed focused on liberating them from their money.

You may be wondering what it means to be a Muppet. Comedian Jeff Foxworthy became famous for his "You might be a redneck if" lines. In that spirit, here is my list of "You might be a Muppet if...":

• You're working with someone who doesn't provide a fiduciary standard of care, only a suitability standard of care
• You're working with someone who hasn't fully disclosed the nature of any conflicts of interests
• You're working with someone who doesn't own the same or equivalent security that is being recommended or sold to you
• You're working with someone who sells investment products instead of only investment advice
• You've ever bought a "structured" investment product (such as an equity-indexed annuity, reverse convertible, equity-linked CD) or any product with an acronym that you don't know what the initials stand for
• You've ever bought a product, but can't fully explain the nature of the risks involved and calculate the cost of the embedded options
• You've ever bought a product that carries commissions when there was a cheaper or more effective alternative
  
• You've ever bought a product with a high yield, while being told it was a safe investment (If there's a high yield, there's high risk, even if you can't see it)
• Your investment research consists of advertisements, star ratings, shouting TV personalities, shock-jock endorsements, or free steak dinners
• You "invest" in an insurance-based product
• You figure an investment must be good because everyone at "the club" is doing it
• You spent more time researching the restaurant you went to last Friday than you did researching your advisor or latest investment
• You believe that your broker sold you bonds, charged only a small transaction fee (such as $25), and didn't include a markup
• You don't insist on independent statements from a third-party custodian (think Bernie Madoff)

How to avoid becoming a Muppet

You can avoid being a Muppet by following this advice: When deciding on an investment advisor, you should require them to make these commitments:

• Our guiding principle is that our advice will be to always do what is in your best interest
• We provide you with a fiduciary standard of care -- the highest legal duty that one party can have to another
• We are a fee-only investment advisor, avoiding the conflicts that commissioned-based compensation can create
• We fully disclose potential conflicts
• Our advice is based on the latest academic research, not on our opinions
• We are client-centric -- we don't sell any products, only advice
• We provide a high level of personal attention -- each client is assigned a team of professionals with which they'll develop strong personal relationships
• We invest our personal assets, including our profit-sharing plan, based on the same set of investment principles and in the same or comparable securities that we recommend to our clients
• We will develop an investment plan that is integrated into estate, tax, and risk management (insurance) plans; the overall plan will be tailored to your unique situation
• Our advice is always goal-oriented -- evaluating each decision not in isolation, but in terms of its impact on the likelihood of success of the overall plan

Finally, be sure to read the advisor's ADV (which you can find at the SEC's website), a disclosure document setting forth information about the advisor, including the investment strategy, fee schedules, conflicts of interest, regulatory incidents, and so on. Careful due diligence will minimize the risk of becoming a Muppet.