I’ve written elsewhere on my blog about the importance of working with an investment adviser who operates with your best interests in mind at all times. It may be confusing, but it is really important to investors, savers and retirees to understand. It comes down to knowing with whom you are dealing, and what their legal obligation is to you as your adviser.
Here is the cast of characters you may encounter when you seek help with your investments:
Independent Registered Investment Advisers are not associated with a broker or dealer such as JPMorgan Chase, Merrill Lynch or Wells Fargo. The investment recommendations they make to you must be in your best interest. Not just suitable, but in your best interest.
The Investment Advisers Act of 1940 requires investment advisers to act and serve the client’s best interests, with the intent to eliminate or at least expose potential conflicts of interest. This is in addition to the requirement that investment recommendations be suitable to the client based on the adviser’s understanding of the client’s financial status, tax status, investment objectives, risk tolerance and other information deemed reasonable.
Since the compensation of investment advisers increases with the amount of money they manage for clients, it is necessary for the adviser to disclose this when the client is considering using their investments to pay down a mortgage or make gifts to children or others, for example.
I started Blair Wealth Management in 2011 as an independent investment advisory because I couldn’t stomach the idea of making recommendations not in the best interest of my clients, as well as suitable for them. Think of it this way – I don’t make any recommendation to a client that I wouldn’t make to members of my family. Nor am I tempted to favor the products of one firm over another’s, since I do not receive commissions or hidden fees from mutual fund managers or the custodians I use.
My investment clients pay one percent per annum of assets under management, with 1/12th paid monthly – totally transparent. With financial planning clients, we agree on a fee for the expertise and time required to prepare the plan – again, totally transparent. The financial planning we do for investment clients, and conversations we have on all related topics, are included in the monthly fee. I do not sell insurance or any other product for which I might earn a commission. I earned the Chartered Life Underwriter® designation to understand the use of insurance for estate planning and planning for business owners and professionals.
Although all Investment Advisers are subject to the Investment Advisers Act of 1940, only Independent Registered Investment Advisers, those not affiliated with or restricted by a broker or dealer, can be considered true fiduciaries.
Dually Registered or “Hybrid” Investment Advisers may be limited in the breadth of their recommendations by the relationship they have with their broker or dealer. They may not have unrestricted access to all products and services that their client might require. This is sometimes referred to as a “Captive Platform.”
The Investment Adviser Act of 1940 exempts from the definition of investment adviser (with the associated fiduciary standard), “any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor.” This clause refers to registered representatives, also known as general securities representatives, stockbrokers or account executives. They must be sponsored by a broker/dealer firm and must pass the Series 7 exam to become licensed to sell securities and obtain the legal power of an agent for their clients. The recommendations they make to clients must be suitable, but needn’t be in the client’s best interest. If they have a choice between a suitable low cost fund from, say, Vanguard, and a suitable higher cost fund marketed by their broker/dealer, it is legal for them to recommend the higher cost fund to their client.
Okay, now we know the players and the rules by which they are supposed to abide. What about the new rule?
The Labor Department’s “fiduciary rule” was to take effect April 10, 2017. The Trump administration has asked the DOL to delay the implementation by four months, to further review its details and impact on investors. The main thrust of the rule is to extend the fiduciary standard to registered reps, stockbrokers and account executives advising clients on their retirement accounts. This would “raise the bar” for them, so that they must make recommendations in the best interests of their clients. It will also reduce their compensation in most cases. This would include defined contribution plans (401(k), 403(b) ESOP, SEP and Simple IRAs.), defined benefit plans and IRAs. It does not apply when those parties are advising clients on their taxable accounts.
Vendors of annuities will also have to disclose their fees to purchasers. Annuities typically pay a guaranteed stream of equal payments over an agreed-upon period of time. They are problematic in that they usually pay large commissions to the salesperson, and have many charges, fees and withdrawal penalties that limit the returns to clients. Moreover, most offer no adjustment for inflation. The one annuity to which most Americans are entitled is Social Security, which is inflation-adjusted.
If and when the Labor Department’s “fiduciary rule” takes effect, it will be good news for investors, both in the quality of the advice they will receive and in the trend toward lower fees on mutual funds and trading costs the proposed rule has spawned. A potential downside for some investors is that there will be fewer advisers available and willing to give them a hand with their investments.
As an independent registered investment adviser, our offer is, and has always been, unbiased investment advice, in your best interest, along with an on-going relationship in which we address your financial planning and other concerns including financial literacy for you and your children, education and career planning advice, and maximizing and managing your retirement income.
If you aren’t satisfied with your current adviser, think the fees you are paying are too high, or would like an independent appraisal of your investments and strategies, we can help. Contact me for a no-obligation conversation to see if we can be of service to you, your family and your employees.
Another way to help your family is to hire us to prepare a financial plan with you. CFP® is the gold standard when it comes to planning. People who work with a Certified Financial Planner® typically become wealthier than those who choose not to explore their current situation and prospects with a CFP® professional.
“Many a false step was made by standing still.” – Timothy Ferriss
Additional tips on how to select a financial adviser can be found on our blog at the links below.