Michael Haubrich, is a certified financial planner with more than 20 years experience. He is the owner of Financial Service Group a fee-only firm in Racine, Wisconsin, with some 100 million dollars in assets under management.He tells a tale that recently he met with a new client who experienced “free financial planning.” According to Michael, the client’s free planning started with a free dinner meeting, followed by a free financial consultation, and then a free financial plan that ultimately ended with an annuity sale resulting in $9,000 in commission to that financial “consultant.”
To most people, it may look as though there is no big issue here but in this case Michael explains that the client’s money was locked into this annuity for 15 years with a penalty cost of up to 18 percent if he cashed it in early. “Since he is now 75, he will be 90 years old before he can withdraw his principal without penalty. It is this surrender charge over the 15 years that provides commissions in excess of 10 percent to the ‘advisor’ who definitely would have a self-serving interest in striking these kinds of deals.”
It is an understatement to say that Michael is one smart fellow and a case such as this one shows what can happen all too often. He asked the client why he bought this annuity and the response was that he “trusted the advisor and thought she would recommend what was in my best interest.” What this comes down to is an understanding of what the differences are between straight out investment salespeople and fiduciaries.
If you turn to the National Association of Personal Financial Advisors, of which Michael is a registered advisor, you will get a clear definition of the fiduciary standard: “Financial advisors who are held to a fiduciary standard occupy a position of special trust and confidence when working with a client. As a fiduciary, the financial advisor is required to act with undivided loyalty to the client, which includes disclosure of compensation and corresponding conflicts of interest.”
Two years ago, TD Ameritrade conducted a survey and found that almost 60 percent of consumers wrongly believed that both stockbrokers and registered investment advisors, or RIAs, have a responsibility to act in their (the consumer’s) best interest. In fact, some 63 percent believed that stockbrokers and RIAs were required to disclose all conflicts of interest before providing financial advice.
Here’s the rub. Only a registered investment advisor is required to act under a fiduciary standard. A representative, such as a stockbroker or agent, working for a brokerage firm or financial institution, is not. Ouch!
It is this important difference that determines a consumer’s course of action if the recommendations do not meet expectations. As Michael points out, in any dispute, the fiduciary has to demonstrate that the advice was in the best interest of the client. An agent or representative only has to treat the customer fairly. “That means the consumer has to be given the requisite legal disclosure on the specific investment, and it is the consumer’s obligation to make the judgment call if that investment is appropriate.”
All financial advisors who are registered investment advisors are held to a fiduciary standard. RIAs are registered with the Securities and Exchange Commission under the 1940 Investment Advisor Act. This law requires RIAs to conduct themselves under a fiduciary standard. If the financial advisor is an RIA, then there is a fiduciary relationship.
They are also required to provide a disclosure statement called a Form ADV. This statement provides information on compensation, conflicts of interest, length of time in business, and other valuable data about the advisor.
Recent regulations promulgated by the SEC now require brokers and other professionals who are not considered fiduciaries to add the following disclosure: “Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by product and over time.”
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