Safe Harbor Blog 

Welcome to my blog. Here you can find my views on the financial world and keep updated on the latest news.

Fiduciary

Fiduciary

The Financial world is littered with conflicts of interest.  Every week there is a new story where a financial advisor performs unethical acts to benefit himself and take advantage of the client. This is the unfortunate reality in the world we live in today.  The biggest reason clients choose a financial advisor is based on trust.  Safe Harbor Asset Management Services abides by the highest form of ethical standard required by law.  This is known as the Fiduciary standard. The Fiduciary standard simply states putting the client's interest before their own.  

Believe it or not but financial advisors are not created equal regarding the "ethical" standard they are required to follow.  This may be a surprise to you but is very true.  In fact, the majority of financial advisors are not required to act in the best interest of the client. You may be asking how can this be?  Most Advisors follow the Suitability standard.  If the investment is suitable for you than it's not against the law to sell.  Suitability relies on whether the investment fits your risk tolerance, diversification, and liquidity needs.  This may sound good but under the suitability standard advisors are not required to be transparent regarding fees and compensation methods.  Due to the lack of transparency advisors are more susceptible of choosing high-cost investments that will benefit himself and the firm he represents. Let's move on and find out how to tell if your advisor is a fiduciary. 

There are three main groups of financial advisors who you will likely come across in your retirement planning journey. 

Insurance Agent - Suitability Standard

Insurance agent? Why would anyone meet with an Insurance agent for financial advice?  Well in most cases people do not understand the person they are meeting with is only Insurance licensed.  They do not wear a button on their jacket that labels themselves as such.  A way to tell is if they are only interested in discussing annuities (fixed, fixed index, or immediate)  or Life insurance.  Fixed Index Annuities (FIA) are a hot topic and being advertised now more than ever.  Another great way is to just ask.  Hopefully, they are honest and will tell you the truth.  This doesn't mean all insurance agents or index annuities are all bad. Insurance Products are commission based and can have many conflicts of interest. If a fixed index annuity is a good fit for your plan, it is imperative you choose a financial advisor who also is a Registered Investment Advisor (discussed below).  

Registered Representative (Broker) (series 6, 66 and/or 7 licensed) - Suitability Standard

A registered representative does just what the name says.  They represent a firm.  If your advisor works for any of the major Wall St. firms (Merrill Lynch, Goldman Sachs, Lincoln) they are registered to represent that firm.  They cannot represent other firms unless there are agreements in place to allow that.  The firm's interest is geared to enhance profits and shareholders interest.  You can see how that structure may not be appropriate for consumers.  Many registered representatives are paid only on transactional based investing.  An advisor who is compensated only on transactions will be more likely to make transactions within the account.  This is a major conflict of interest because evidence suggests the more an account is actively traded the worst the account performs.  Another major disadvantage is the lack of transparency under this structure.  Many times it is impossible to know all the fees a client is paying only from a statement.  Outside resources such as Morningstar is often required.

Registered Investment Advisor (Series 65 licensed) - Fiduciary Standard

At last, we arrive at the Registered Investment Advisor who IS a fiduciary and are required to advise clients to only allocate money the same way that advisor would if he was in your shoes.  This is the preferred advisor to seek regarding investment advice.  Fee's are transparent and are often less.  

That's fairly simple to understand.  Unfortunately, it becomes a little more complicated.  

There are two types of Registered Investment Advisors- 

Fee-Only -  The most popular fee-only structure charges a fee based on a the amount of assets you have invested with the firm.  If you have $1,000,000 invested and they charge 1% you are effectively being charged $10,000 for the year.  This is an oversimplification of course due to market fluctuation.  If your portfolio drops 25% you will pay 25% less.  This fee structure limits the firm to only advise clients to market-based portfolios.  Market-based (Stocks, bonds, REIT's) limit options that contain a higher degree of volatility. My opinion is the fee-only structure is great for accumulating assets.  This structure makes it challenging to design solid retirement income plans due to it's limitation of managing the underlying portfolio risk.  

Fee-Based - To be a fee-based financial advisor,  the advisor is also licensed as an insurance agent or/and registered representative (series 66).  Let's break it down

Registered Investment Advisor w/ registered representative - Many Registered representatives hold dual license to also act as a Registered Investment advisor.  This is a very tricky design because it's hard to distinguish whether the advisor is wearing the fiduciary hat or acting as a registered rep for the firm.  I do not recommend this model.  The same conflicts of interest exist as a registered representatives.  The reason an advisor carries the dual license is to open up more avenues to get compensated. Transparency is not a requirement on many of financial transactions. 

Registered Investment Advisor w/ Insurance License - If you are still reading at this point you may have figured out this is the format I believe to be the best option for retirees. Adding fixed index annuities, Fixed annuities, and immediate annuities along with life insurance are vital in being able to look out for a retiree's best interest.  Insurance companies only compensation method for these financial instruments are through commissions. Due to this there ARE more conflicts than Fee-only but also many more options to consider for planning purposes.  

If you are still confused, or not sure the structure of your financial advisor's firm, give me a call or shoot me an email and I'll be happy to help.

 

Wishing you a Blissful and Proserous Retirment!

-Eric Bowser

Retirees Most Significant Risk!

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