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Sometimes the Case?
By Rick Kahler MS CFP http://www.KahlerFinancial.com
Can a financial advisor represent your best interests and still earn a commission? Surprisingly, this can sometimes be the case.
But … It’s up to you to find out.
Fiduciary
Being required to put the consumer’s interest first, which means representing a client rather than selling products and services to a customer is called having a fiduciary duty. While fee-only planners are inherently fiduciaries, they don’t exclusively own the fiduciary domain. The definition of a fiduciary duty does not inherently ban receiving commissions. Numerous statutes and applications of common law can require someone receiving a commission from selling a financial product to act in a fiduciary capacity.
One such circumstance was discussed in a blog post at http://www.kitces.com by Duane Thompson, president of Potomac Strategies, LLC, a legislative and public relations consulting firm.
Registered Investment Advisor
Those registered with the SEC as Registered Investment Advisors (RIA) under the Investment Advisers Act of 1940 are required to uphold a fiduciary standard of care. Advisors must register as RIAs if they, “for compensation, engage in the business of advising others” about investing in securities and as a central part of the business.
The 1940 Act has almost nothing to say about linking compensation to fiduciary responsibility. While large firms selling financial products can argue whether they must register as RIAs, it is clear that anyone registered as an RIA is held to a fiduciary standard, regardless of their compensation structure.
That said, the chances are an advisor who is compensated 100% by commissions is not an RIA and not held to a fiduciary standard. Of the 11,475 adviser firms registered with the SEC, only four are commission only, according to Thompson. Of the remainder, those that receive a commission also charge some type of fee.
The Odds
The overwhelming odds are that, if you don’t pay a fee to a company giving investment advice or selling a financial product, they are not legally required to look after your best interests.
Even though an RIA who is totally or in part compensated by commissions has a legal obligation to put your interests first, they may still have a conflict of interest, which the SEC requires them to disclose. The size of that conflict of interest depends on the percentage of an adviser’s revenue derived from selling financial products.
Example:
For example, a RIA receiving 90% of their revenue from the sale of financial products has a large conflict of interest. The sustainability of the company and advisers’ careers depends upon sales. Arguably it’s going to be very difficult for an adviser to remain unbiased, especially if what may be in the client’s best interest is a no-load, low cost index mutual fund or variable annuity; which pay no commission.
Conversely, an advisor receiving 99% of their revenue from fees and 1% from commissions on the sale of low-cost term life insurance has almost no conflict. The sale of the insurance is most likely a convenience for clients and has an insignificant financial impact to the adviser.
[Fiduciary Advisor versus Sales Man/Woman]
In order to find out the likelihood of advisers upholding a fiduciary standard, first ask whether they are a RIA with the SEC. If not, they owe you no fiduciary responsibility. You are a customer.
Assessment
If an adviser is an RIA, however, don’t assume there is no conflict of interest that may taint the fiduciary relationship. Ask how much of the firm’s gross revenue comes from commissions on the sale of financial products and how much comes from fees paid directly by clients. The higher the percentage of revenue that comes from fees, the lower the conflict of interest and the greater the chance you will receive unbiased, client-centered advice.
Conclusion
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Filed under: Ethics, Financial Planning, Op-Editorials | Tagged: agents, commission advice, Duane Thompson, fee-only planners, fiduciary, Investment Advisers Act, Mike Kitces, registered investment advisors, RIA, rick kahler |
The Great Reformation That Never Happened
Despite all the talk about restoring the public’s trust in the financial services industry, many financial professionals don’t believe the industry is better off than it was before the financial crisis.
According to a recent survey by Labaton Sucharow and the University of Notre Dame’s Mendoza College of Business, 47 percent of financial professionals say it’s likely that their competitors have engaged in unethical or illegal activity in order to gain an edge in the market, up from 39 percent in 2012.
https://wealthmanagement.com/blog/great-reformation-never-happened?NL=WM-27&Issue=WM-27_20150520_WM-27_458&sfvc4enews=42&cl=article_7&utm_rid=CPG09000002702210&utm_campaign=2787&utm_medium=email
More than one-third of those earning $500,000 or more have witnessed wrongdoing firsthand in the workplace. And about a quarter would likely use non-public information to make a guaranteed $10 million if there was no chance of getting caught.
Chuck
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FEEs
The majority of brokers are not paid on the basis of the quality of their advice, but rather on the fee income they generate from their clients.
To resort to a medical analogy, this is equivalent to prohibiting doctors from recommending drugs that kill you, while not actually requiring they prescribe the best drugs to cure your disease. Moreover, this would occur in a world where doctors are paid based on the sales generated by their prescriptions. People would be highly concerned to entrust their health to such a doctor.
Barnard
http://www.amazon.com/Dictionary-Health-Economics-Finance-Rachel/dp/0826102549/ref=sr_1_16?ie=UTF8&qid=1432663943&sr=8-16&keywords=david+marcinko
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Should Advisors Get Paid At All?
Robo-advisors are driving down the fees clients pay for asset management, but what if even 25 basis points is too much? What if clients should not be paying anything at all for it?
http://wealthmanagement.com/blog/should-advisors-get-paid-all?NL=WM-27&Issue=WM-27_20150723_WM-27_868&sfvc4enews=42&cl=article_6&utm_rid=CPG09000002702210&utm_campaign=3269&utm_medium=email&elq2=9985ff0a34264114afeae9932d8684e8
Will Ortel at Enterprising Investor amplifies the point made by Firefox co-founder Blake Ross in this post, suggesting even firms like Wealthfront are charging too much for investments
Cullen
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FINANCIAL ADVISORS EXPOSED
In 2014, JPMorgan Chase & Co. suffered one of the industry’s largest losses of information, estimating at the time that hackers had accessed contact information on more than 80 million clients [1/4 country].
Chief Executive Officer Jamie Dimon vowed to increase the bank’s security budget and embarked on a hiring spree to build out those operations for what he called “a permanent battle.” And, he has repeatedly updated investors on those efforts in annual letters.
Ha Ha!
Nelson
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