When you turn over your hard earned money to a financial advisor, you would expect that your best interests will be taken to heart. In the end, that’s not always the case.
Over the years, investors have lost trillions in the markets, especially with the last two major market corrections. As a result, it can be safely assumed that a number of advisors do not have their client’s interests first and foremost on their minds.
Most clients trust their financial advisors, and some may even consider them to be friends or family. But, unnecessary missteps with your money are keeping you from achieving financial security. From personal financial gain, judgment, lack of communication with the attorney, accountant, or not being well-rounded are some factors that interfere with your advisors ability to help you achieve the financial goals you set. Some advisors know their clients will tolerate bad results a lot longer if they forge a friendly relationship.
Fiduciary vs. Suitability Standard
The standard to act in a client’s best interest is called fiduciary duty. Registered representatives and stockbrokers are held to a lesser measure, known as the suitability standard. Basically, it merely calls for brokers to sell investments they believe are suitable for their clients, not necessarily what’s best. This difference can mean a substantial amount of money in the long run.
For example, let’s say you invest $10,000 a year in a low cost investment and end up earning more than $1 million over a 30-year period. Investing the same amount with your broker’s “suitable” product can cost you a few percentage points each year, leaving possibly hundreds of thousands of retirement dollars out of your hands, all while earning your broker more commission.
Strip away the jargon and the problem is obvious; most investment products sold can be deemed “suitable” that are not in your best interest. Unfortunately, the average investor often doesn’t know the subtle difference and is at a disadvantage because of how this profession operates.
Registered Investment Advisors (RIAs) and Investment Advisor Representatives (IARs) vs. Registered Representatives and Insurance Agents
The investment industry has evolved so now different professionals are governed by different standards. For instance, Registered Investment Advisors (RIAs) and Investment Advisor Representatives (IARs) are governed by the fiduciary standard; Registered Representatives, stockbrokers and insurance agents are not.
Registered representatives, stockbrokers and insurance agents primarily sell on commission. Investment Advisors and Investment Advisor Representatives never receive commissions, only fees for managing client’s assets and providing investment related advice. Avoiding unnecessary expenses, 12b-1 fees, high turnover, and inefficiency is the key to a successful financial plan.
Recently, registered representatives and stockbrokers have been touting fee-based advising; however, know it is not at full capacity. FINRA has set guidelines where they may allow the advisor to take fees for financial plans, but not asset management fees. In other instances, the advisor may take fees to refer clients to a third-party manager on their approved list, but you won’t be able to use other managers, or even manage the portfolio yourself.
All in all, brokerage firms and insurance companies are being regulated; however, under a much weaker standard. Most individuals would be appalled to see how hard some companies in the financial industry are working hard to avoid acting in the best interests of their clients.
For most of the time, registered representatives, stockbrokers, and even most insurance agents are not allowed to offer any additional services, as it might contradict the investments they are trying to sell you. The recommendation may seem suitable from a buy-and-sell concept, but your tax return may feel the pain when you file and are past the point to fix problems.
Financial planning is the process of setting financial goals and determining the steps needed to achieve those goals. It also includes retirement and estate planning, as well as tax management. The proper tax plan includes gift and charitable planning, which in conjunction can save you a considerable amount in taxes.
Although a substantial amount of Investment Advisors and Investment Advisor Representatives might not have a full business model as described above, eventually most will and that is an enormous advantage in your favor.
In conclusion, the next time you visit with your financial professional, find out if they operate under a fiduciary standard. If the answer requires explaining, chances are your investments are not operating to their maximum potential.
Carlos Dias Jr. is the Founder and Managing Partner of Excel Tax & Wealth Group, a fee-only financial and wealth management firm. He is a licensed investment advisor and a Registered Financial Consultant (RFC®) with the International Association of Registered Financial Consultants (IARFC). Over the past 8 years, Carlos has been educating investors on financial, tax, estate, charitable, and retirement planning.
Carlos has appeared on CBS as an expert, and is a contributor for TheStreet and Yahoo. Follow Carlos on Twitter (@CarlosADiasJr), connect on LinkedIn, like on Facebook, plus on Google+, or visit his website at www.carlosdiasjr.com.