A Tale of Two Financial Advisers
Let me tell you a story of two types of financial advisers. It is fictional, but it illustrates how commission-based firms differ from adviser’s who have a fiduciary responsibility to their clients.
A retiree is offered by his former employer to buy out his monthly retirement pension with a lump-sum that will qualify to go into an IRA. He asks his broker at a well-known NYC-based firm what he should do. He also asks the same question of a fiduciary adviser firm to whom he is paying a stated fee for financial planning advice.
The broker says,
“Take the money, put it into your IRA and we will help you with it like we have with your other investments.”
The fiduciary firm says,
“Keep the monthly pension, given the substantial other assets you already have invested, and further, name your new spouse as beneficiary to continue receiving payments in the event of your death.”
The fiduciary firm provides an analysis to the retiree supporting their recommendation while the NYC broker provides a phone call in which they provide no analysis of the options, but they do discuss calculations of how money can grow when compounded over time, and they make it clear that their firm knows what it is doing in such matters.
The retiree is really confused by such conflicting comments until he reads an article on fiduciary rule that helps him get some perspective. The article describes how the Department of Labor (DoL) h
as been concerned about how brokers and other commission based sales people are under no legal obligation to put client’s best interest first when providing advice on retirement assets to clients. The retiree comes to the conclusion that the broker at the NYC-based firm may have been primarily motivated by the compensation he would receive from investing the lump-sum distribution. The retiree chooses to follow the fiduciary adviser’s advice.
The Department of Labor’s Fiduciary Rule
The Department of Labor on April 6, 2016 issued the final rule “requiring all who provide retirement advice to plans and IRAs to abide by a ‘fiduciary’ standard – putting their clients’ best interest before their own profits.” A February 2015 White House report titled “The Effects of Conflicted Investment Advice on Retirement Savings” had estimated the cost of the conflicted advice (that this DoL fiduciary rule is addressing) to be an estimated $17 billion per year. Two important points about the new DoL rule:
- The new DoL rule requires “clients’ best interest first” only on retirement assets. On taxable accounts, for instance, such a rule does not apply for the brokerage firms.
- The fiduciary advisers (such as our firm) continue as we always have, to operate as fiduciaries, putting clients’ best interests first, on all matters and all assets.
While all firms are motivated by profits, investors deserve to clearly understand the main motivation of the financial firm where their investments are managed and its employees. Here is how to find out: ask your adviser and their firm to put in writing that they are a fiduciary required to put your best interests ahead of their profits on all of your assets. Remember, motivations matter!
Date Published: May 4, 2016
Authored By: T. Taylor Payne
Phone: (812) 603-6301
The information in this material is only as current as the date indicted, and may be superseded by subsequent market events or for other reasons. Statements concerning financial market trends are based on current market conditions, which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. While all information prepared in this document is believed to be accurate, any statements of opinion constitute only current opinions of Payne Wealth Partners, Inc., which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. Accordingly, you should not put undue reliance on these statements.