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Should You Take Retirement Advice from a Salesperson?

Should You Take Retirement Advice from a Salesperson?

October 12, 2016

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.

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I only have two small accounts left at Merrill Lynch. My advisor there told me I should think about managing the investments myself instead of using him. Is this what's going to happen?

In reply to by Jeremy H (not verified)

No offense meant at all, just you said "small" accounts, so it got me wondering... Are advisors petty enough to tell investors to go somewhere else if they feel like those investors earn them enough money? So like hypothetically speaking, could it be that you don't make enough transactions to earn him enough money? 


Hi L.L.,

Yes. You are spot on and thanks for pointing that out! The 'money management' business catagorizes accounts in different ways, and size can matter greatly. Most advisors (roughly 60%) require some kind minimum of investible assets in order to access certain investing strategies or funds. The miniumum varies-- in this instance, a small retirement account size at a typical broker might be anything less than $100k. As the fiduciary rule is implemented, the commission brokerage industry is yelling that "the sky is falling" to alarm people whose retirement accounts fall into the 'smaller' category that when brokers have to charge flat fees, instead of racking up commissions from transactions, those brokers will drop those smaller-sized accounts. Why? Because they won't be able to make enough money in fees to make it worth their while which of course, only pushes more consumers to find fee-only financial advisors and planners who do not care about account size. 

There are thousands of qualified advisors who work directly and only for you and who do not put restrictions on the level of assets you have to invest or manage. Those advisors' fees can be charged by the project, the plan, by the hour, or retainer fee. And all depends on level of complexity, but you'll know exactly how much you're paying for the advice because these advisors are transparent and will a) want to keep your costs as low as possible and b) they'll gladly show you all the expenses and calculate your returns net of fees and any transaction costs. In other words, they're on the same side of the table as you.

This is why when I'm matching you to the right individual advisor, I ask you questions that help me screen out the advisors who won't be a good fit for you, and one of the questions I ask on Wealthramp is "what's the approximate value of your investible assets?" I don't want to match someone who has $10k looking for a road map-like financial plan to a money manager who requires $1M in assets and doesn't offer planning. Other questions I ask are to find out what kind of help you're looking for-- someone newly divorced will be comfortable with an advisor who not only provides investing strategies, but offers a detailed plan for moving forward. This type of advisor has deep knowledge of the unique financial issues and the emotional needs of clients who have gone through divorce. 

We have been conditioned to believe that you can walk into any brokerage firm in any town, and expect to magically wind up with just the right financial advisor, and he or she will hopefully fit with your circumstances. The financial services industry has turned the advisor search into a totally random process. 

No wonder people get stressed out trying to find a financial advisor. 



I'm 25 and I am just getting started invention. You broke down the warning signs I should look out for. Thanks for steering me in the right direction. 

I can’t believe there’s a systematic provision for the advisors to not do their jobs 

The only time the "f" word is a good thing... But that can be turned around on them too after they create loopholes and people figure out the new way they get ripped off

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