Objective information about financial planning, investments, and retirement plans

Don’t Settle for Suitable Financial Advice


Suitable Financial Advice

Revised February 22, 2016

My first blog post  relating to a Fiduciary Standard that many of us had hoped would soon be enacted into law Why Should I Care if My Financial Advisor is a Fiduciary? was written in October, 2009.  It’s now February, 2016 and we are still waiting for a Fiduciary Standard.

Supposedly a proposal by the Department of Labor that especially pertains to new rules for financial advisors who deal with IRAs and other retirement plans is pending and will be signed by the President later this year. Call me skeptical as to both whether this will actually happen and, if it does, how much protection will really be afforded to investors. The financial services lobby is influential and well-funded.

As an investor you should be outraged.  Moreover, in my opinion, you should not have to settle for financial advice that involves selling you financial products that are merely suitable for you.

Suitable for whom?

This definition from the Clausen Miller law firm which I used in my 2009 post is still the best concise definition of the suitability rule that I have found:

The suitability rule provides that when a financial representative recommends to an investor the purchase, sale or exchange of any security, a financial representative shall have reasonable grounds for believing that the recommendation is suitable for such investor upon the basis of the facts, if any, disclosed by such investor as to his or her other security holdings and as to his or her financial situation and needs. 

So what’s the problem?  The rule says nothing about the financial advisor putting the interests of the client above their own.  In fact a registered rep with a broker-dealer owes their first loyalty to the B-D firm.  There is nothing to say the rep should put a client in the best financial product available, just simply a financial product that is suitable for their needs.  As an example, a rep for a given broker-dealer might push a variable annuity product offered by their employer instead of a lower cost VA offered by another firm like Vanguard that might be a better fit for their client.  Among the reasons for this is the fact that there is no way for the rep to be paid for selling the lower cost product.

Why is it taking so long to adopt a fiduciary standard? 

In my opinion this has not happened because the major financial services firms don’t want it to happen.  They have deep pockets and have spent a lot to lobby against doing the right thing for you, the investing public.

Some of the major brokerage firms have said that they will not be able to serve investors with smaller account balances if they have to adhere to a Fiduciary Standard.  Are they serious?  And if they are is this a bad thing for those investors?  Are these firms and their registered reps really doing smaller investors a favor by putting them in high cost, poor performing financial products that often enrich the advisor far more than the client?

Why work with a financial advisor who is a fiduciary? 

Don’t you deserve an advisor who puts your interests first?  Aren’t you entitled to advice that isn’t tied to the sale of financial products?  NAPFA has published this guide to selecting a financial advisor.  There is some great information here and I encourage you to use this as you choose the right financial advisor for your unique situation.

Don’t settle for suitable financial advice.  Insist on a financial advisor who puts your needs first and provides advice based only on helping you to reach your financial goals.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.

Photo credit:  Flickr

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Conference Season in Chicago – Fi360 Conference

Chicago Skyline 2008

Last week I wrote about the start of the financial conference season here in Chicago. This week I wanted to share my thoughts about one of those conferences, the Fi360 Conference.

Fi360 is based in Pittsburgh and offers the Accredited Investment Fiduciary and the Accredited Investment Fiduciary Analyst designations. The training behind both designations enhances the knowledge of advisors working with qualified retirement plans, high net worth individuals, as well as foundations and endowments.

In addition, Fi360 offers their Toolkit software which provides a concise, easy to understand, yet powerful means to screen and evaluate mutual funds, ETFs, and other investment vehicles. I have used the Toolkit for many years and consider it an essential part of the analysis that I do across my client base.

Naturally I was excited when I heard their annual conference would be coming to Chicago. The conference was held Thursday and Friday of last week.

There were many excellent sessions including:

Author Justin Fox discussed The Myth of The Rational Market. Fox provided an excellent historical perspective on rational markets and market thinking over the past century.

Dave Gray of Schwab discussed a Schwab survey highlighting the gaps in perception surrounding retirement plans between plan sponsors and plan participants. The gaps between the two stakeholder groups was in some cases mind boggling. This was a great session for anyone providing advice to a qualified retirement plan.

On Friday morning noted historian and author Doris Kearns Goodwin discussed here best-selling book Team of Rivals: The Political Genius of Abraham Lincoln. Her insights were both humorous and at times  very telling in terms of the political divide we see today in Washington. In between the lines are many leadership lessons across business and finance.

There was an excellent session by a panel that included well-known ERISA attorney Jason Roberts that discussed some of the practical aspect of becoming a 3 (38) advisor to retirement plan sponsors. This is certainly one of the hot issues in the ever changing retirement plan advice landscape.

Fred Reish, a preeminent ERISA attorney, discussed the issue of benchmarking in light of the new 408(b)(2) disclosures required of 401(k) sponsors later this year. Fred did a great job of discussing things advisors should consider in this new environment.

Liza Horvath, a Trust Manager from California, provided some great insights into drafting and implementing investment policies for non-profit endowments.

Besides these and other great sessions, the folks who provide phone support to us Toolkit users were on hand to demonstrate tips for using the product and to answer several of my questions in person. It was great to meet these folks in person and place a face with a voice.

Mostly, though, it was great to attend a conference with some 650 other advisors and service providers who share my passion for what the term Fiduciary stands for. A lot of credit for the raised awareness of the role of the fiduciary must go to the folks at Fi360. From their training connected with the two designations mentioned above, to their publications, to their Toolkit software Fi360 provides advisors with the tools to serve our clients in a fiduciary manner. The conference was a great way to see all of this in one place.

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Client Interests Shouldn’t Come First?


The financial services lobby (primarily major brokerage firms and insurance companies) have vigorously fought a proposed Fiduciary Standard that would cover all who provide financial advice to consumers.

They have made arguments including one that many investors with smaller accounts might find themselves without access to advice as a result of an inability to charge commissions on these smaller accounts (an argument that is not necessarily true).

The bottom line here is that a financial advisor who acts as a Fiduciary is required to place the best interests of their clients first. Maybe I’m making this all too simple, but to me the opponents of a Fiduciary Standard for all advisors are saying that the interests of their clients shouldn’t (or don’t) come first.

If the client’s interests don’t come first, whose interests do come first? I’ll leave that as a rhetorical question for you the reader to answer.

I first wrote about this topic in 2009 in my post Why Should I Care if My Financial Advisor is a Fiduciary? Sadly this debate continues between the regulators, the financial services lobby, and groups who support a Fiduciary Standard for all advisors.

Some resources you can use in choosing the right financial advisor for your needs:

NAPFA’s Pursuit of a Financial Advisor Field Guide; an excellent resource to help guide you through the process of finding the right financial advisor for you.

6 Questions to Ask Your Financial Adviser, an article that I recently wrote for the US News Smarter Investor Blog.

As always feel free to contact me  if I can be of help.

Full disclosure, I am a Fee-Only advisor and a member of NAPFA, the largest professional organization of fee-only advisors in the country. We sign a Fiduciary Oath towards our clients when we join and reaffirm that oath annually upon the renewal of our membership.

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The Fiduciary Standard-It’s All about Expectations


The issue of who is and who isn’t a Fiduciary has been in the news a lot this year. The recently passed Dodd-Frank law requires the SEC to deliver a study about differences in the oversight of Registered Investment Advisors and Broker-Dealers to Congress in January. After that the SEC will be charged with developing rules that govern the standard of care due to individual investors.

I’ve shared my thoughts about the Fiduciary Standard frequently on Twitter, LinkedIn, and in this prior post.

When all is said and done, however, I think the issue is a simple one. Whether an investor engages the services of a Registered Investment Advisor (RIA), a representative of a Broker-Dealer, an insurance agent, or anyone holding themselves out as a provider of financial advice, individual investors should have the expectation that this person is acting in their best interests. Simplistic, yes. Common sense, I sure hope so.

Many brokers and insurance companies have argued that instituting this type of standard would be too costly and they might be unable to serve many smaller investors. Please, give me a break. Are these companies admitting that some of their representatives are selling products that are not in their client’s best interests?

Will we get a uniform standard of care for all financial advisors serving individual investors? I’m skeptical, but hopeful we will at least see a vast improvement over the current suitability standard that most financial sales types are now held to.

What do you think? Please feel free to add any comments or thoughts about this issue.

What should you do if you are looking for a financial advisor?  My very biased suggestion is to check out the NAPFA Find an Advisor link http://findanadvisor.napfa.org/Home.aspx.  All of my fellow NAPFA members and I adhere to a Fiduciary Oath and we pledge to put our clients first.

My 2010 Fiduciary Wish List – Progress to Date


In December I wrote 2010 The Year of the Fiduciary? In this post I put forth three items on my “Fiduciary Wish List” for 2010.

  1. Adoption of a Clear Fiduciary Standard.
  2. Transparency and full uniform disclosure of 401(k) fees and expenses.
  3. Adoption of rules defining acceptable advice arrangements for 401(k) plan participants.

Last week the House passed a Financial Reform bill which empowers the Securities and Exchange Commission to impose the same fiduciary duty on broker-dealers and insurance agents currently met by investment advisers. This is in many ways a victory for those of us advocating a Fiduciary Standard for ALL financial advisors who advise the public, including those who sell financial products.
The fight is far from over, however. The bill still must pass the Senate. Additionally the SEC will spend the next several months studying this provision and how best to enact it. This will include the opportunity for public comment. You can expect the financial services firms and their lobbyists to mount a full-court press on Senators, regulators and anyone else with influence over this matter. It will be interesting to see what, if anything is finally enacted.
To date little has been done to require transparency and full uniform disclosure of 401(k) fees and expenses. In fact the Senate Finance Committee has done its best so far to quash disclosure to 401(k) participants. A few providers are moving towards openness and disclosure, Putnam is notable here. Perhaps they see the handwriting on the wall. Even with this, I would suggest that their disclosure and openness still warrants scrutiny by plan sponsors.
The delays in the adoption of rules defining acceptable advice arrangements for 401(k) plan participants are unconscionable in my opinion. The Pension Protection Act was passed in 2006. The Obama Administration rightly blocked implementation of the advice provisions allowing conflicted advisors (fund companies, commissioned advisors and others who might stand to gain based upon the choices made by plan participants). As a fee-only advisor I fully support the prohibition of conflicted advisors. However the Administration seems to be taking its sweet time in finalizing the regs. Plan participants are confused and surveys show that they want direct advice as to how to best invest their retirement money and about how to plan for retirement.
Six months into 2010, some progress but not enough in my opinion. These issues are serious and they impact the financial well-being of many hard-working Americans. I hope that the House, the Senate, and the SEC see fit to do what is in the best interest of consumers and that they ignore the dollars and influence of the financial services firms and get all of these items passed into law.

2010 The Year of the Fiduciary?


In the wake of the carnage caused by the recent stock market downturn, much has been written and proposed surrounding the idea of fiduciary standards and responsibilities. This is by and large a good thing.

Congress, the SEC, and the DOL are looking at rules changes designed to protect the investing public. This is positive, providing that they enact changes that make sense, provide clarity, and that are tough for financial services firms and brokers to circumvent.

Chris Carosa recently posted an excellent article on the Top Fiduciary Stories of 2009.

Looking ahead, here is my Fiduciary “wish list” for 2010:

Adoption of a clear Fiduciary Standard. The public has a right to know what they can expect in the way of a Financial Advisor’s obligations to act in the best interests of their clients. Suitability does not cut it. Proposed rules allowing advisors to “change fiduciary hats” when working with clients on different aspects of their relationship seem absurd. The public, in my opinion, has a right to expect that financial advisors will act in their client’s best interest period. Anything else falls short.

Transparency and full, uniform disclosure of 401(k) fees and expenses. Much has been written about the drop in the value of investor’s 401(k) accounts. A Time Magazine article went as far as advocating that 401(k) plans go by the wayside. I think this is overreacting. A major problem with many 401(k) plans is the lack of transparency regarding the underlying fees and expenses of the plan. Excessive plan expenses serve to reduce participant returns as they are often paid out of plan assets in full or part. Rules requiring plan providers such as insurance companies, mutual fund companies, etc. to fully disclose all plan costs and revenue received under revenue sharing arrangements in a uniform, fully disclosed fashion would be a major step forward. This would allow sponsors, participants, and consultants to evaluate and compare a plan provider’s costs and fees in a uniform manner. I am convinced this would help reign in plan expenses and be a major victory for plan participants in their quest to save for retirement.

Adoption of rules defining acceptable advice arrangements for 401(k) plan participants. The Pension Protection Act (PPA) has provisions defining acceptable advice arrangements for Fiduciary Advisors providing direct advice to plan participants. These provisions allow for “conflicted” advisors to qualify if certain conditions are met. The Obama Administration recently delayed finalizing these provisions allowing conflicted advisors to participate. My hope is that the DOL will approve final advice provisions so that plan sponsors and advisors know how to move forward with advice for plan participants. In my opinion education just does not work, participants need and want direct investment advice. I also hope that the final advice provisions prohibit conflicted advisors from participating. The last thing participants need is advice from advisors who may have motives other than acting in the best interests of plan participants.

The year almost ended has been a year where fiduciary issues made news. My hope is that 2010 is the year where real, concrete progress is made on the fiduciary front.