Should You Take Retirement Advice from a Salesperson?
The world of wealth management has always been rife with conflicts of interest. Brokers and insurance reps are in the business of selling investments to generate revenue for their firms, period. But even when they say they charge fees rather than commissions, and even when they say they are putting you first, they are still in the business of selling transactions. Investment recommendations are still based on a very limited menu of products, and those products tend to come with high fees. Asking them for objective investment advice is like asking your seven-year-old what should go on the top of your grocery list.
Salespeople who want to act as fiduciary financial advisors
Thanks to the new fiduciary rule that goes into effect in April 2017, all financial advisors, (including brokers and insurance agents) who offer retirement advice will now be required to consider their clients' financial interests ahead of their own compensation. With 10,000 baby boomers turning 65 every day, the Department of Labor (DOL) came up with this new fiduciary rule as a way to protect retirement savers from shoddy advice.
Here’s how this shakes out. There are now two kinds of financial advisors. One type is the broker we all recognize from the Wall Street firm who sells investments and needs to put his brokerage firm first—ahead of you, the investor—in order to stay employed. Again, they may be marketing trust but they are brokers first. They are only allowed to offer you the investments their employers allow them to sell. Of course placing your financial interests first is something any advisor should practice without needing a rule, and most people assume it’s always the case, but the reality is that many don't. Try asking your broker to buy you shares in a Vanguard ETF. They can’t, because their firms compete with these funds.
Pick a lane
Then there's the other type of financial advisor: advisors and wealth managers who operate independently. There are thousands of qualified registered investment advisors who are probably already operating at the fiduciary level, providing clients objective guidance. Independent registered advisors’ compensation comes from advice fees you pay to them directly. Since they’re not pushing investment products for their firms, they have no motivation to steer you into the most expensive funds. They are free to recommend best-in-class investments, including low-cost ETFs such as Vanguard funds. The challenge for consumers is recognizing who’s a real fiduciary and who isn’t.
Now this is where it gets confusing.
Everybody’s now using the “f” word
In this case, the "f" word refers to the term "fiduciary." Regulators meant for the label to represent a sign of transparency for investors looking for truly unbiased advice, but now the marketing departments of some of the country's biggest banks and Wall Street brokerage firms have jumped on the bandwagon to call their financial salesforce "fiduciaries."
But a true fiduciary is legally obligated to put your best interests ahead of his or her compensation all of the time. A brokerage firm is still only obligated to ensure that investment recommendations are merely “suitable” for you; not all investments deemed suitable are, in fact, in your best interest. Even under the new fiduciary rule, most brokers are still motivated by commission. A survey conducted by PayScale recently found that commissions make up most of their total compensation. Merrill Lynch just announced it is now allowing retirement investors to choose between a managed account for a fee based on the amount of assets under management or a less costly do-it-yourself service. That sounds like a big step in the right direction--until you consider that another study determined that Merrill Lynch is charging investors some of the highest fees in the industry.
Will you exempt me from working in your best interests?
So how do you know whether you have a true fiduciary or just a salesperson with the word "fiduciary" in their job title? One clue is the firm they work for. If their firm only adheres to the lower suitability standard, then the advisor who works at that firm will not always act as a fiduciary. They might offer fiduciary advice but will also likely rely on an agreement called Best Interest Exemption that still allows them to make specific product recommendations.
As absurd as it is to believe any financial advisor would actually ask you to sign a "Best Interest Exemption," (think about that for a minute), it’s true. The BICE (Best Interest Contract Exemption) is an agreement between you and the advisor’s firm, and it’s a permission slip you sign which allows them to sell you a product or recommend a strategy even when knowing there is a conflict of interest. The exemption agreement must disclose fees and also identify those conflicts of interest. In practice, it means sometimes a broker will act as a fiduciary, but sometimes he’ll peddle his products as a salesman. Signing a BICE essentially gives the broker a safe harbor to recommend an investment product that may benefit them more than it benefits you, and that is a conflict of interest, no matter how much lipstick you apply.
The fiduciary rule actually makes choosing a financial advisor easier
Wall Street brokerage firms have been generating billions of dollars in revenues using a sales-driven model for decades. Then along came the Internet, which has exposed the downsides of getting financial advice from a broker and now shines a bright spotlight on the high fees and conflicts of interest. Now it’s actually easier to rule out advisors who work for firms that don’t adhere to the higher fiduciary standard at all times. I recommend that you consider what kind of advice or financial guidance you really want. The new DOL rule has drawn a clear line in the sand for financial advisors. Now consumers should also pick a lane in choosing an advisor, especially for retirement advice. If it’s real advice you want, you can operate knowing that you shouldn’t settle for less than a full-time fiduciary advisor who isn’t under constant pressure to sell high-commission investments. I’ve come up with five essential questions to help you ascertain who’s a fiduciary and who isn’t.