Objective information about financial planning, investments, and retirement plans

Why Should I Care if My Financial Advisor is a Fiduciary?

Share

House Financial Services committee members sit...

The Department of Labor recently released its final draft of their fiduciary rules mandating that financial advisors place their client’s best interests first when offering advice on their retirement accounts. Here is a post I wrote just before the release. DOL Fiduciary Rules – What Do They Mean For You?

Much has been written of late, and more will be written (including on this site), about the issue of financial advisors as fiduciaries under the new DOL fiduciary rules.  The phase-in of the new rules begins in April of 2017, with full implementation on January 1, 2018.

At the end of the day, however, why should you as an investor care if your financial advisor is a fiduciary?

Definition of a Fiduciary

fi•du•ci•ar•yA financial advisor held to a Fiduciary Standard occupies a position of special trust and confidence when working with a client. As a Fiduciary, the financial advisor is required to act with undivided loyalty to the client. This includes disclosure of how the financial advisor is to be compensated and any corresponding conflicts of interest.

This is the definition of Fiduciary used by NAPFA (National Association of Personal Financial Advisors) the largest professional organization of fee-only financial advisors in the United States.

Why should you care if your financial advisor is a fiduciary?

Stock brokers are regulated by FINRA, who required them to make recommendations that are suitable for their clients. I’ve never come across a good definition of what suitable really means. Here is one definition I did find several years ago on the website of Clausen Miller a law firm with offices in major U.S. and international cities:

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.

This really doesn’t specify anything about loyalty to the client, disclosure or anything else. The word reasonable is quite vague at best.

This brings me to the reason that clients should care if their financial advisor is a fiduciary. As a client I would want to know that my financial advisor is acting with my best interests at heart, that he or she is making recommendations to me that are in my best interest. In fact, as you receive disclosures telling you that your broker, financial advisor or registered rep is now a fiduciary acting in your best interests a logical question is, “Weren’t you doing this in the past?”

Several years ago Charles Schwab ran an ad depicting a brokerage office pushing the stock of the day and used the phrase “…let’s put lipstick on this pig…” While humorous (and perhaps exaggerated) I fear that it did reflect the mentality of many product pushing sales people calling themselves financial advisors.

Many investors don’t understand

The worst part is that most of the investing public doesn’t really understand all of this. Many financial advisors who were previously subject to the suitability rules are competent and concerned with the welfare of their clients. They make recommendations that are in line with the best interests of their clients. Unfortunately, there are others who don’t and were not required to under the vagaries of the suitability rules.

While the final fiduciary rules were watered down a bit from prior draft versions, they none the less will change the landscape for financial advisors and their clients. Pay attention to any and all disclosures that you might receive from your financial advisor. Ask questions and don’t settle for half-baked answers.

Approaching retirement and want another opinion on where you stand? Not sure if you are invested properly for your situation? Check out my Financial Review/Second Opinion for Individuals service.

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 the Hire Me tab to learn more about my freelance financial writing and financial consulting services.  

Photo credit:  Wikipedia

Conference Season in Chicago

Share
Although this year is an exception, we generally have a short non –winter season here in Chicago.  For my money there is no better city for a conference when the weather is nice. 
Sponsors of financial conferences have certainly noticed this and “conference season” is in full swing through early fall.
Yesterday I attended a one-day session sponsored by Pension & Investments Magazine called the 401(k) Investment Line-up Summit.  There were some excellent sessions geared toward retirement plan sponsors and those of us who provide consulting advice to them.
Tomorrow and Friday I will be attending the Fi360 Conference downtown.  I’ve been a user of their Toolkit product for a number of years and have a great deal of respect for the organization.  I am looking forward to many of the sessions.  I will be posting about my experience at the conference here next week.
In May I will be attending the NAPFA (the largest professional organization of fee-only financial advisors in the country) conference here.  It’s always great to see many of my fellow advisors.  As good as the conference sessions might be I always learn more from ad hoc conversations with my fellow advisors.
Finally in June I will be attending the Morningstar Investment Conference.  This conference has really grown over the past decade and always provides insights into the investment process and into specific investment vehicles.
You might be saying to yourself, that’s quite a time commitment.  These conferences are great opportunities to learn from great speakers and to talk shop with other advisors.  My clients pay me for what I know it is my responsibility to stay current within my industry.
Thankfully I really enjoy learning about financial planning, investments, retirement plans, and related areas.  These conferences are hardly all fun and games.  The days are typically long and I generally commute back and forth from home to downtown each day for local events.  There are conference fees and the added cost of travel for out of town events.
Overall the benefits far outweigh the costs in terms of time and money.  Next time you talk with your financial advisor or if you are trying to select one ask them how they keep current and what types of conferences they attend.  There’s no right answer, but listen and judge their response for yourself.
Enhanced by Zemanta

The Similarities Between Buying Coffee and Choosing a Financial Planner

Share

Choosing a Financial Planner

A couple of years ago my family bought me a Keurig single cup coffee maker. I love the ability to make a freshly brewed cup on-demand; the convenience has served to fuel my already robust coffee addiction.

Our local Sam’s Club sells a variety of K-Cup brands; they typically are boxes of 80 for around $37. Starbucks recently entered the K-Cup market so when I saw their box for sale at Sam’s I bought one. It wasn’t until I opened it a few days later that I noticed there were only 54 individual units for the same $37 price. It was clearly marked on the box, but I was so used to boxes of 80 that I never noticed.

When looking for a financial planner it is also important to know what you are getting for your money before entering into any sort of relationship.

First you need to understand that anyone can call themselves a financial planner. This is no requirement that they have any particular training or credentials in order to hold themselves out as a financial planner.  Do they hold the CFP® certification or perhaps the PFS certification (the CPA’s financial planning certification)? There are an ever increasing number of certifications and designations in this field. Some are more meaningful than others so be sure ask many questions here.

Understand the services offered. Do they provide comprehensive financial planning; investment advice; or advice on an ad hoc basis? More importantly does the planner offer services that match your needs?

Understand how the planner will be compensated. Is this person truly a financial planner, or do they simply sell financial and insurance products? Are they paid an hourly fee, an ongoing retainer or percentage of the investment assets they will be managing for you, or some sort of fixed project fee? Is their compensation all or in part based upon the sale of financial products?

Understand the planner’s value proposition. What does he or she bring to the table that makes their services unique and right for you?

Just like my coffee buying experience, it is important that you fully understand who you are hiring as a financial planner, what they will and will not do for you, the benefits of hiring that person, and how much you will be paying for their services.

NAPFA (the largest professional organization for fee-only financial advisors) has published a guide to finding an advisor.

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

Check out our Resources page for links to some tools and services that might be beneficial to you.

Photo credit:  Wikipedia

Enhanced by Zemanta

How is my Financial Advisor Compensated? – Fee-Only vs. Fee-Based

Share

An assortment of United States coins, includin...

Fee-Only is pretty straightforward. The client pays the advisor for his/her advice. The fees can take one or more of several forms:

• A flat fee for the services rendered.
• A percentage of the client’s investment assets or in some cases another metric such as net worth.
• Hourly

Additionally the fee can be for one-time or ongoing services. In no case will a Fee-Only advisor receive any compensation from sales commissions, trailing commissions, or any other form of compensation derived from financial product providers.

Fee-Based compensation is bit fuzzier and quite often very misunderstood by the public. A typical Fee-Based arrangement might work like this:

The advisor will charge a set fee for the initial financial plan. This is the “fee” part of the arrangement. However, in many cases, if the client wants to implement the advisor’s recommendations for investments, insurance, and other financial products this will be done via the sale of commissioned products.

Where Fee-Based can become even more confusing is in the case of a broker or registered rep using a wrap program as a means to implement investment recommendations. A wrap involves investment management services for a percentage of the assets under advisement, a structure similar to that used by many Fee-Only advisors.

What differs in most cases is that the Fee-Based advisor and their broker-dealer will also receive compensation from the underlying investment vehicles (mutual funds, etc.) in the form of 12b-1 fees or a similar form of trailing fee, or in the form of commissions on stock trades executed exclusively through the advisor’s brokerage firm. Additionally it has been my experience that often the assets under management fee for these wrap programs is higher that charged by most Fee-Only advisors for similar asset levels.

I am a Fee-Only advisor and am admittedly biased. My point in writing this post was not to disparage those advisors who are not Fee-Only, although I do remain convinced that this is the most client-friendly compensation structure. Rather, I want to reiterate that clients and those looking for a financial advisor need to understand what they are paying for, how much they will be paying, and how they will be paying for financial advice and any financial or investment products they will be purchasing.

For more please see my prior posts:

How is my Financial Compensated? 

Why Should I Care if My Financial Advisor is a Fiduciary? 

The idea for this post originally came from a recent post and some of the subsequent comments on the Oblivious Investor Blog:

How Much Does a Financial Advisor Cost? 

Wondering where you can find the names of Fee-Only financial advisors in your area? Check out NAPFA’s website and click on the Find An Advisor button on the left side of the site.

Please feel free to contact me with your questions. 

Please check out our Resources page for more tools and services that you might find useful.

Photo credit:  Wikipedia

Enhanced by Zemanta