A few decades ago, everything investment advisors did had to be in their clients’ best interests. However, that’s not so much the case today.
Over the next two minutes, Steve reveals how the investment advisory business has changed. And he has a few questions every investor should ask their broker.
It’s time to quiz your investment advisor.
I read an article this past week about all the changes Obama is pushing for that concern investment advisors and how they do their job. Specifically, the conflicts of interest they could have when making recommendations.
When I was a broker, advisor, whatever they call them now, there was one overriding rule and I thought it was the law.
Rule No. 1: Everything you do must be in your client’s best interest. Everything!
Rule No. 2: When in doubt refer to Rule No. 1. And we lived by it. At least, at our firm, we did. There was no gray area, either.
But somewhere along the line a very large gray area has emerged in the advisor business and it is wrong – just plain and simple wrong. And you had better be sure this big gray area isn’t costing you money.
There are now things like “backdoor payments” and “hidden fees” that incentivize brokers to push clients into bad retirement investments that have high fees and low returns.
A recent report stated that, over time, such “conflicted advice” from advisors lowered retirement account returns by a full percentage point, costing investors about $17 billion a year.
So here are a few specific questions you need to ask:
Does he or she – your advisor – collect a commission for executing trades with a particular market maker (called “soft dollar” arrangements)?
Are there revenue-sharing agreements that incentivize your advisor to push their company’s in-house mutual funds? Or undisclosed payments for providing “shelf space” to outside funds? (That means make them available to you.)
At present, the only standard in place to direct advisors’ behavior is what is called a suitability standard. Advisors can recommend an investment if it is suitable for the client’s needs and risk tolerance. But that is a far cry from being a fiduciary standard or one that requires them to make the best decision for a client based on all the information they have available to them.
A survey conducted by Opinion Research Corporation found that 60% of respondents assumed that insurance agents and stockbrokers were already held to a fiduciary standard. The poll then described the difference between a fiduciary standard and a suitability standard. And 90% wanted their brokers to adhere to fiduciary rules.
Take the time to find out if your advisor is doing what is suitable or if it’s the best he can do for you.