MONEY financial advice

Even a “Fiduciary” Financial Adviser Can Rip You Off If You Don’t Know These 3 Things

man in suit with briefcase stuffed with bills
Roy Hsu—Getty Images

After years of fits and starts, the move to require brokers and other financial advisers to act as fiduciaries—essentially making them put their clients’ interests first—seems to be gaining traction again. Witness President Obama’s recent speech at AARP on the topic. Whether a fiduciary mandate eventually comes to pass or not, here are three things you should know if you’re working with—or thinking of hiring—an adviser bound by the fiduciary standard.

1. Fiduciary status doesn’t guarantee honesty, or competence. The idea behind compelling financial advisers to act in their client’s best interest is that doing so will help eliminate a variety of dubious practices and outright abuses, such as pushing high-cost or otherwise inappropriate investments that do more to boost the adviser’s income than the size of an investor’s nest egg. And perhaps a rule or law requiring advisers to act as fiduciaries when dispensing advice or counseling consumers about investments will achieve that noble aim.

But you would be foolish to count on it. Fact is, no rule or standard can prevent an adviser from taking advantage of clients or, for that matter, prevent an unscrupulous one from using the mantle of fiduciary status to lull clients into a false sense of security. As a registered investment adviser with the Securities and Exchange Commission, Ponzi scheme perpetrator Bernie Madoff had a fiduciary duty to his clients. Clearly, that didn’t stop him from ripping them off.

Fiduciary or no, you should thoroughly vet any adviser before signing on. You should also assure that any money the adviser is investing or overseeing is held by an independent trustee, and stipulate that the adviser himself should not have unrestricted access to your funds.

2. Your interests and an adviser’s never completely align. There’s no way to eliminate all conflicts of interest between you and a financial adviser, even if he’s a fiduciary. If an adviser is compensated through sales commissions, for example, he may be tempted to recommend investments that pay him the most or frequently move your money to generate more commissions. An adviser who eschews commissions in favor of an annual fee—say, 1% or 1.5% of assets under management—might be prone to avoid investments that can reduce the value of assets under his charge, such as immediate annuities. Or, the adviser might charge the same 1% a year as assets increase even if his workload doesn’t.

My advice: Ask the adviser outright how your interests and his may deviate, as well as how he intends to handle conflicts so you’ll be treated fairly. If the adviser says he has no conflicts, move on to one with a more discerning mind.

3. Even with fiduciaries high fees can be an issue. Much of the rationale over the fiduciary mandate centers around protecting investors from bloated investments costs. But don’t assume that just because an adviser is a fiduciary that his fees are a bargain, or that you can’t do better. Advisers can and do charge a wide range of fees for very similar services, and fiduciaries are no exception. So ask for the details—in writing—of the services you’ll receive and exactly what you’ll pay for them. And don’t be shy about negotiating for a lower rate, or taking a proposal to another adviser to see if you can save on fees and expenses.

A fiduciary may have a duty to put your interests first. But that duty doesn’t extend to helping you find a competitor who may offer a better deal. That’s on you.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

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MONEY fiduciary

Obama to Wall Street: Stop Acting Like Car Salesmen

Obama at the podium giving a talk
Alex Wong—Getty Images

President Obama will push for a "fiduciary standard," which would require financial advisers to act in clients' best interests.

It’s an issue that’s pitted Main Street against Wall Street for years. Now President Obama is wading into the murky question of what ethical duties financial advisers owe their clients when they recommend products like mutual funds and annuities.

On Monday, President Obama plans to use an AARP event to tout something known as the “fiduciary standard,” which would require financial advisers to act in the best interests of their clients, much as a lawyer must do.

That may seem like a no-brainer. But in fact, investment pros who call themselves “financial advisers” currently are not required to give clients the best advice or products that they can offer. They never have been. In the eyes of the law, financial advisers—once more commonly known as stockbrokers—are like car salesmen or the guys selling TVs at the local big box store: They can and do tout products that offer the heftiest profits and commissions.

To be sure, investment advisers have never been allowed to recommend just any investment. Current law requires they sell investments that are “suitable” for their clients based on factors like age or risk tolerance. In practice, however, that often means actively managed mutual funds with hefty sales loads or annuities with complex and expensive guarantees. Compared to low-cost index funds and exchange-traded funds, these investments can end up costing savers tens of thousands of dollars over the years it takes to build a retirement nest egg.

Raising the legal standard to a fiduciary one might stop that practice. That’s a big reason that consumer advocates, including the AARP and the Consumer Federation of America, have been calling for years to require all advisers to act as fiduciaries.

Both the Securities and Exchange Commission and the Department of Labor, which has jurisdiction over 401(k) plans, have taken stabs at requiring advisers to become fiduciaries. The issue was a key point of contention in the debate of the 2010 Dodd-Frank financial reform bill. While the bill ultimately included language that appeared to authorize the SEC to implement the financial standard, five years later the proposal is still stalled. One key point of contention: Financial advisers that work on commission tend to take on less wealthy clients. That has allowed Wall Street firms—and especially big insurance companies whose agents sell annuities—to argue that tougher rules would deprive middle class investors of advice.

Of course, it may seem strange that members of Congress would listen to what big business thinks is best for middle class investors while ignoring AARP and the Consumer Federation of America. But that only speaks to the strange ways of Washington—and, of course, to the ingenuity and determination of the financial services lobby.

The White House push appears to focus on advice doled out to investors in retirement plans. While that’s a huge group of investors, it’s not clear what effect, if any, the proposal would have on advice regarding taxable investment accounts. Any new rules could also be crafted to permit brokers to continue to earn commissions, something that many investors advocates are likely to see as a potentially fatal loophole.

MONEY financial advisers

What Is a Fiduciary, and Why Should You Care?

Your investments are at stake, explains Ritholtz Wealth Management CEO Josh Brown (a.k.a. The Reformed Broker).

MONEY financial advisers

My Client Is Making a Terrible Financial Choice. What Do I Do?

Wallet being protected by little green army men
John Lamb—Getty Images

When panic drives someone to make a self-destructive money decision, it's the financial adviser's job to protect the client from himself.

Suppose one of my clients has his heart set on using half of his retirement account to buy each of his grandchildren a new car. Or a client in a panic over falling markets wants to sell all her stocks and buy gold. What is my responsibility as their financial planner? How far should planners go to try to keep clients from making serious financial mistakes?

It’s important for planners to respect clients’ competence and ability to make their own life decisions. Client-centered planners also need to remember that the goal is to help clients get what they want, not what the planner might want or think the client should want. On the other hand, should a planner stand idly by and watch someone walk off what the planner perceives as the edge of a financial cliff?

Part of the answer to this dilemma stems from a planner’s legal obligation. Most advisers who sell financial products have no fiduciary duty and are not legally required to put their customers’ interests first. Fiduciary advisers, which include those who are fee-only, do have a legal obligation to act in their clients’ best interests.

What is the legal responsibility, then, of a fiduciary planner who believes clients are about to do themselves financial harm?

Let’s say I have a client who is about to do something that may be viewed by a court of law as “extreme” or “imprudent.” (An example would be putting all his money into one asset class like gold, cash, or penny stocks.) At the minimum, I would need to protect myself by carefully fulfilling my legal responsibilities. This would include making certain I emphasized to the client that, given the research and data available, his actions could hurt him financially. I also would want to be sure the client fully understood and took responsibility for his actions.

In terms of the broader aspect of what financial planners owe to their clients, meeting this legal obligation is not enough. In my view, fiduciary planners’ obligation to put clients’ interests first includes an ethical responsibility to do no harm. Sometimes this ethical and legal responsibility requires planners to give clients information they may not want to hear.

As we focus on the clients’ goals and help them carry out their wishes, part of our role is to make sure they have all the information they need. This gives us a responsibility to educate ourselves so the advice we offer is as sound as we can make it. We also need to do whatever we can to help clients hear and understand that advice.

Clients who are hovering on the edge of a financial cliff are typically about to act out of strong emotions such as fear. They often can’t take in financial advice until they are able to move through that fear. It only makes things worse if financial advisers shame clients, bully them, or abandon them to their fears. The challenge for planners is to help clients reach a more rational place so they can gather additional information and make decisions that will serve them well.

With the right kind of support, clients are almost always able to get past the fear that is pushing them to make imprudent decisions. Providing such support by working with clients’ emotions and beliefs about money, perhaps with the help of a financial therapist or financial coach, is well within a financial planner’s ethical responsibility. Our role is not merely to do no harm. It is also to use all the tools we have to help clients act in their own best interests.

———-

Rick Kahler, ChFC, is president of Kahler Financial Group, a fee-only financial planning firm. His work and research regarding the integration of financial planning and psychology has been featured or cited in scores of broadcast media, periodicals and books. He is a co-author of four books on financial planning and therapy. He is a faculty member at Golden Gate University and the president of the Financial Therapy Association.

MONEY financial advisers

You Mean I Have to Pay for Financial Advice?!?

When financial advisers switch from working on commission to charging clients directly, they can run into resistance.

Financial advisers who transition from a commission-only business to a fee-based model are often stymied about how to explain their new fees without sending existing clients packing.

Some fear clients will feel sticker shock upon hearing they need to pay fees out of pocket instead of having costs deducted from investment accounts. Advisers also worry clients may question why they’re now paying a fee equal to one percent of their assets under management, instead of a fraction of that for their load funds.

The problem is that most investors don’t understand how adviser compensation works or how it affects the services they receive, says John Anderson, a practice management consultant with SEI Advisor Network, a unit of SEI Investments in Oaks, Pa. Many investors do not know what it means for an adviser to be a fiduciary, or somebody who acts in a client’s best interests, Anderson says.

A 2011 study by Cerulli Associates, a consulting firm in Boston, showed that 31 percent of investors thought financial planning services were free and one-third didn’t know how they paid for advice. What’s more, most investors prefer to pay hidden commissions instead of account fees, according to Cerulli studies.

Some clients might push back when advisers begin asking for fees, but their concerns usually dissolve once advisers show clients the benefits.

FOCUS ON SERVICES

Morgan Smith, an adviser in Austin, explained the ethical obligation of a fiduciary to his clients when he transitioned to a fee-only practice. “I asked, ‘Would you rather work with someone whose compensation structure has nothing to do with your best interest or someone whose structure is based on your best interest and goals?'” he says.

Every client except one, a day trader, stayed on. But some asked why they would pay him if their investments declined. He told them his advice would pay off more in a down market and that “when your investments go down, I get paid less,” he says.

Sheryl Garrett, whose Garrett Planning Network includes more than 300 fee-only advisers, says clients need to understand the difference between advisers who can afford to give advice because they sold a product and advisers who are objective because they have “no skin in the game.”

Clients who are paying for advice also need to know what other problems advisers are solving in exchange for the additional compensation, says Anderson. He tells advisers to create a one-page list of their services. That may include rebalancing clients’ portfolios and analyzing their future social security benefits.

He also starts client conversations by highlighting what they’ve recently accomplished, such as filling in paperwork to name beneficiaries for IRA accounts.

Anderson and Garrett both believe in showing clients that their daily decisions have more of an impact on their finances than the investments or insurance products they buy. It’s a holistic approach that often wins over clients, they say.

Related: Find the Right Financial Planner

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