Are You and Your Financial Advisor Both “On the Same Page?”
Wouldn't you assume that your financial advisor is giving you advice based on
This is your life savings that we are talking about. Don't you deserve a financial advisor that has your needs front and center regarding planning with your money?
Unfortunately, this isn't always the case.
It's important to understand the two general types of advisors in the financial industry, there are those who are “fiduciaries” and those who are not. This is critical for you to know in order to understand the motivation behind the person offering you financial products or advice. Are you and your financial advisor both “on the same page?”
(the suitability standard):
- Offers products for sale from a range of products carried by the company he or she represents
- Is paid commissions calculated as a percentage of the amount of money invested into the product
(the fiduciary standard):
- Offers “best advice” taking into account the needs of each individual client
- Is paid a quarterly fee calculated as a percentage of the assets under advisement
The fiduciary standard requires advice to be provided in the best interests of the client including the disclosure of possible conflicts of interest.
The suitability standard states that a broker only needs to check the suitability of a prospective buyer, based primarily upon financial objectives, current income level and age, in order to complete a commissionable sale of a financial product. In a way, when a broker checks the suitability of a potential buyer, they are measuring how much financial product can be sold, not the needs of the investor. No disclosure of possible conflicts of interest is required. Common differences between the two standards involve trading commissions; for example commissions and incentives paid by mutual fund companies back to the broker dealer. These inter-company inducements can create conflicts between the investor’s requirements and the motives of the broker. When a company suggests the purchase of a proprietary product, such as a mutual fund or an inventoried security, such as a bond, in the knowledge they will receive a direct and upfront commission, can that suggestion be relied upon to be fair for the advantage of the client?
So, why should you care?
The differences discussed above were a contributor to the 2008 credit crisis, especially within the selling of complex financial products based on housing debt. More recently, the initial public offering (IPO) of Facebook stock was roiled by alleged conflicts of interest by those offering the stock.
Every day, financial products are sold for a commission and include internal costs and fees which are difficult to find and define. The dollar value of these commissions and additional internal costs are usually deducted from the amount an investor invests in a financial product. The total return of such a product may therefore be reduced by the value of these hidden costs. In 2010, the Wall Street Journal brought this issue to the attention of the investment public with their article: “The Hidden Costs of Mutual Funds.”1 A further example of how low the bar is set for broker disclosure of costs and conflicts can be found within the article “Shining a Light on Murky 401(k) Fees.”2
The Hidden Costs of Mutual Funds published March 1st, 2010. Copyright Wall Street Journal.
2 Shining a Light on Murky 401(k) Fees published November 13, 2010. Copyright Wall Street Journal.
Since 2008, the U.S. Government has also begun to care about how financial recommendations are delivered to members of the general investing public. The lack of “self-policing,” protection of client interests and frequent scandals have led our legislative system to pass The Dodd-Frank Wall Street Reform and Consumer Protection Act.
One goal of this legislation was the creation of a single standard for financial advice based upon the current fiduciary standard.
Informed investors should ask: “Why does the government feel I need protecting and from what?”
Next time you talk to your financial advisor ask them to formally list all the areas in which they and their company can receive commissions. If they cannot or will not, we strongly urge you to consider whose best interests they have at heart.
Today’s financial industry offers its clients a wide range of options. At Cornerstone Retirement Group we
fiduciaries, and in our eyes, every client deserves to have their needs put first and solutions offered according to those needs If you would like to visit with us to review your retirement plan, give us a call at 775-853-9033.