Is Your Financial Advisor Conflicted?

May 6 2014, 9:22pm CDT | by

Watch out: that broker-sold mutual fund or IRA rollover move might not be in your best interest. Why? Broker-dealers must have reason to believe that an investment they recommend is suitable for you. By contrast, a registered investment adviser is held to a higher “fiduciary” standard of putting clients’ best interests first.

In advance of new proposed Department of Labor rules to protect retirement savers from salespeople expected this summer, a group of consumer advocates met in Washington, D.C. today calling for action on the problem of sales pitches dressed up as financial advice.

“When investors are steered into products that have higher costs and unnecessary risks, investors suffer very real financial harm,” said Barbara Roper, director of investor protection with the Consumer Federation of America. “It’s harm that’s pervasive and has a material impact on their ability to save for an adequate and decent retirement.”

The problem as the consumer advocates see it is that some financial advisers are free to put their own financial interests first, recommending investments that generate extra money for them, even if those investments are not the best choice for the consumer and will leave consumers poorer.

Where is the evidence of harm? Sheryl Garrett, a fee-only planner and founder of Garrett Financial Planning Network, told a horror story of dozens of telephone company middle-aged employees offered early retirement. They worked with a self-proclaimed “retirement specialist” who had them basically trade in their employer-provided defined benefit pension plan for an expensive variable annuity contract, costing them a 10% tax penalty, and 2.4% a year for the annuity.

The specialist pocketed a fat commission, but the annuity didn’t pan out. Now in their 60s, the folks are back at work trying to make ends meet. The DB plan would have meant a guaranteed income stream for life. “Cashing in a DB plan that was in great shape is close to insanity,” Garrett says, adding, “If she had variable annuity salesperson tattooed on her forehead, this wouldn’t have happened.”

In light of these issues, the DOL is considering whether to expand the circumstances in which financial professionals have a fiduciary duty to their clients, by updating rules that date back to 1975. The change is especially urgent today as workers have increasing responsibilities towards managing their retirement money in 401(k) workplace plans and individual retirement accounts. The DOL rolled out a fiduciary proposal in 2010, but it was attacked by the financial industry as being unworkable.

“An update of the existing regulations is long, long, overdue,” said Shaun O’Brien, assistant director of public policy with the AFL-CIO.

In the meantime, the Securities and Exchange Commission has said it will make a decision about whether to go forward with similar fiduciary rules that are expected to be more industry-friendly (it’s had a rulemaking in the works since 1999). Roper dismissed the idea that the DOL should step aside and defer to the SEC.

But the Consumer Federation of America, along with other consumer groups including AARP and the CFP Board, urged the SEC to make a move by the end of the year in an April letter showing evidence of investor harm from the suitability standard instead of the higher fiduciary standard.

In the case of broker-sold mutual funds, there are often cheaper, equivalent mutual funds, for example. And while there’s a huge sales push for individuals to roll over 401(k) money into retail Individual Retirement Accounts, in many, if not most cases, workers would be best served by keeping their money in their former employer’s plan or transferring it to their new employer’s plan. Employers are required by law under to manage their plans in the best interest of their plan participants.

Want conflict-free financial planning advice? One place to start is by searching for a fee-only planner at the National Association of Personal Financial Advisors at Napfa.org.

And if you’re confused about the differences between a broker-dealer, an investment adviser, and a registered rep, FINRA (the industry’s self-regulatory arm) has a cheat sheet on selecting investment professionals, including a broker disciplinary record look-up tool, here.  Just be warned, the current system is hardly transparent. Individuals who work for broker-dealers—the sales personnel whom most people call brokers—are technically known as registered representatives, and registered reps may also go by such generic titles as financial consultant, financial advisor, or investment consultant.

The bottom line: just because someone calls themselves an “advisor” doesn’t mean they have to put your best interests first. At least for now.

See also:

10 Questions To Ask A Financial Advisor

 
 
 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

NASDAQ is Back at 2000 Dot-Com Bubble Level
NASDAQ is Back at 2000 Dot-Com Bubble Level
The Dot-Com force is back at the NASDAQ. It took Silicon Valley 15 years to bring back the NASDAQ to the Dot-Com Bubble Levels. With startup valuations in the billions becoming the norm, Wall Street is following up with driving up the value of public traded tech companies.
 
 
Bill Gates Tops Forbes Billionaires List Again
Bill Gates Tops Forbes Billionaires List Again
Microsoft co-founder Bill Gates is back on top of the Forbes Billionaires list.
 
 
$75,000 Apple Watch revealed
$75,000 Apple Watch revealed
When Apple's designs are not exclusive enough then there are 3rd parties who add gold and diamonds to the iGadget to make them precious. Brikk announced the Lux Watch, a diamond studded version of the Apple Watch.
 
 
Sony will not Sell Off TV And Mobile Spinoffs
Sony will not Sell Off TV And Mobile Spinoffs
Sony President Kazuo Hirai clarified on Wednesday that the company will not immediately sell off the spun out TV and mobile phone business.