Paying Hidden Costs Because your Broker’s not a Fiduciary?

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Investors often choose big banks and investment firms over smaller financial advisors because they think the brand name and size makes the service and product offerings better. In actuality, it’s often the reverse.

Unless your firm is a Fiduciary, chances are there are sales quotas and contests for the non fiduciary, “suitability” reps, who are often paid extra to put clients in proprietary funds that are not in the clients’ best interests, but that reap commissions for the brokerage house.

Last Friday the SEC issued a statement announcing that three investment advisers “have settled charges for breaching fiduciary duties to clients and generating millions of dollars of improper fees in the process.” The release goes on to say that “PNC Investments LLC, Securities America Advisors Inc., and Geneos Wealth Management Inc. failed to disclose conflicts of interest and violated their duty to seek best execution by investing advisory clients in higher-cost mutual fund shares when lower-cost shares of the same funds were available.”

And according to an article in Investment News last week, it turns out smaller credit card and savings customers may not have been the only ones who were misled in the Wells Fargo “fake account” scandal. The article states that “according to inside sources, some clients of the bank’s wealth-management division were steered into investments that maximized revenue for the bank and compensation for its employees.”

When will this stop and why would any one continue to do business with one of these non Fiduciary firms?

The big problem is lack of transparency. Most investors don’t understand how the business works and how broker-dealers make their money. That means the investors are, in effect, investing blindfolded. And while there are many good, principled people at the larger firms, because they are not bound by the Fiduciary Standard, there is lots of potential for recommending something that is “almost as good” as the best product for you.

The result is that, according to a survey just released by the CFA Institute, a majority of investors believe that their advisors fail to fully disclose conflicts of interest and the fees they charge. Only 35% of individual investors polled believe that their advisor always puts their clients’ interests ahead of their own and only 25% of the institutional investors who participated in the survey.

April is National Financial Literacy month and one of the most important Financial Lessons investors – and potential investors – can learn this month is what “Fiduciary” means and why it’s so critical to your financial health.

When you’re working with a fee-only Fiduciary, they have sworn to only recommend financial products that are the best for their clients. Most broker-dealers in large wire houses have only agreed to uphold the “suitability” standard, which means they are allowed to recommend investments that are “suitable” – not best – for you but potentially yield a markup for their company or bonus or commission for them.

If you’re unclear about what fees you are paying, share classes you own, or how much your funds are costing you in annual expenses, contact us for a free analysis of your currents investments and the costs associated with them.

Particularly during Financial Literacy Month, make sure your Financial Advisor is working for you.


Your Next-to-the-Last Will and Testament: Estate Planning When You’re Young

Age based

There was an excellent article in the WSJ last week about a topic most of us don’t really want to think about (but really need to:) how to prepare in case you die young.

No one likes to think about dying and absolutely no one likes to think about the possibility of dying young. Lately it’s hit home for me, though, because two of my high school friends were diagnosed with cancer over the last year. Both are in remission now, thankfully, but it brings home the fact that it never hurts to be prepared.

The bottom line is: if you’re old enough to be filing your taxes this month, you’re old enough to take basic steps to create basic estate documents. And yes, things will evolve and there will be adjustments to make over your – hopefully – long and prosperous life. But it’s never too early to get started.

  • The single most important thing we all need is a will and/or account beneficiaries, so that it’s clear where you want your assets to go. Statistics show that not only do most young people not have a will, but that most young parents who do have wills haven’t updated them when they had a second or third child. At the very least make sure you’ve named beneficiaries for all your bank and investment accounts (also known as TOD or  “transfer on death” provisions), to prevent having the courts probate and decide how to transfer your assets. If you need help we can connect you with our excellent network of Washington area professionals who can advise you about making the best choices for you and your loved ones.
  • If you have kids, naming guardians for them is critical, to protect them should the unthinkable happen.
  • And don’t forget yourself! My mother just had knee replacement surgery about two weeks ago and, just before she did, she handed me her advanced medical directive. I was grateful she did (she’s fine!) and your loved ones will be grateful to know what your preferences are if they ever need to make decisions for you. In addition to a life insurance policy, don’t forget disability insurance in case for some reason you can’t work. I’ve never had to use the policy I took out in my 20s but I’m glad it’s there.
  • And finally, why not create a notebook or file where all your important documents are handy? It’s a great habit to get into when you’re young. Or you could gather your documents in a tool like the online document vault our clients have access to. So take a moment and get organized – most likely you wont need it for a long time but you’ll have created a great habit for yourself.

April is a great time for an overall financial check-up: you have all your tax documents organized, which means it will be that much easier to get these important personal documents organized as well. April is also Financial Literacy Month so, as always, call us if you have questions or for a free consultation and financial check-up.