Investors Must Discover Their Advisors’ Conflicts’-of’Interests

If an adviser will not agree in writing to be a fiduciary to you, run do not walk away. This is saying that their advice is in the brokers’ best interest not yours. These non fiduciary advisers will have a different product for every situation. You will be better served with a prudent portfolio and remain disciplined. There are three simple rules of investing own equities, globally diversify and rebalance.

Different risk and return of investment for th...
Different risk and return of investment for the different investors (Photo credit: Wikipedia)

Conflicts-of-interest between financial advisors and their own clients remains a major problem in the financial services business since it costs investors billions and violates the fiduciary standard, according to author Chuck Epstein.“Conflicts-of-interest are common, especially in the mutual fund industry where fund companies pay investment professionals a fee, called revenue sharing, for recommending their own funds over a competitor’s,” Epstein said.

He added that revenue sharing has been called “the primary source of conflicts-of-interest, which taints professional relationships between investment advisers and their clients.”  As defined by the SEC, revenue sharing occurs when the investment adviser to a fund makes payments to a broker-dealer for expenses it incurs when selling the adviser’s funds.  These payments are made to investment professionals, who sell funds to individuals and 401(k) plan participants. ethics

But in practice, revenue sharing is paid to advisers or 401(k) plans administrators based on how much they sell and how long an investor owns the funds.  Since advisers receive revenue sharing payments regardless of fund performance, it can make it difficult for advisors who take revenue sharing payments to provide objective analysis, Epstein said.

Epstein, the author of “How 401(k) Fees Destroy Wealth and What Investors Can Do To Protect Themselves.” cited that a 2010 Government Accountability Office report found that “if left unchecked, conflicts-of-interest could lead plan sponsors or participants to select investment options with higher fees or mediocre performance, which, while beneficial to the service provider, could amount to a significant reduction in retirement savings over a worker’s career.”

Discover the Benefits of RIAs

One way to minimize or eliminate the dangers of receiving investment advice tainted by conflicts-of-interest is by working with a Registered Investment Advisor (RIA).

According to James Watkins III, JD, Certified Financial Planner®, AWMA® and owner of the blog, CommonSense InvestSense, “RIA firms are fiduciaries by law and, as such, are required by law to always put their clients’ interests first. What many investors do not realize and are not told is that many stockbrokers, insurance agents and other financial advisers are not held to a fiduciary standard, which allows them, some would argue requires them, to put their own financial interests ahead of their clients’ best interests,” Watkins said.

The Wall Street bullies need brokers and agents to sell their ‘products’.. Investors need conflict free advice to successfully reach their long term financial goals. Seeking the advice of a fiduciary adviser will help investors reach these goals.

Please comment or call to discuss.

Posted via email from Curated 401k Plan Content

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Siedle’s Rules for Handling Financial Adviser Conflicts of Interest

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The new fiduciary standard for all advising clients on investments will help avoid these conflicts. The question remains, why is the financial services industryso adamant about not following the fiduciary standard?

First, conflicts of interest are generally to be avoided. Why? It’s a simple matter of loyalty. You want to know that the agent you’ve hired to handle your hard-earned savings is exclusively motivated by what’s best for you and not what’s best for him or his firm. Again, conflicts result in real harm. We’re not concerned here with theoretical moral dilemmas. The concerns are improper economic incentives and divisions of loyalty that will cost you. Every financial adviser that admits to a conflict will, in the same breath, tell you that you should not be worried. Already the guy is lying to you. Don’t believe it for a minute. Conflicts are red flagsthat demand your attention. Don’t dismiss your concerns before you’ve even begun to address them.Second, conflicts of interest are to be tolerated only when they are either (1) unavoidable; or (2) the potential rewards outweigh the risks. In my professional experience, when it comes to investment products and services, rarely, if ever, are conflicts unavoidable. You can almost always find another firm with comparable pedigree and performance results that is not subject to the conflict at issue. There are tens of thousands of advisers out there and unless you’re living on a deserted island, seriously consider whether you can get the same product or service without the attendant baggage, i.e. conflict-related risk.

More likely, you may believe that the potential reward (future outperformance) outweighs the potential risk (known conflicts). That may be a valid conclusion but the question is: how did you arrive at it?

Great article. The financial services industry will need to more thoroughly train their representatives on what they sell rather than how to sell more.

Please comment or call to dicuss how this affects you and your financial future.

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The 408(b)(2) Burden on Fiduciaries.

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For small to mid sized employers to remain competitive for talented employees and retain thise employees they must improve the quality of the qualified retirement plan their offer. This can be done by outsourcing this responsibility to experts in the field.

In evaluating service providers, plan fiduciaries should not limit their analysis to cost. Instead, fiduciaries must take into account other factors that are relevant to making a prudent decision, such as conflicts of interest, the results being produced by the service provider, references, and the needs of the plan and its participants. The preamble to the proposed regulation explains: “A responsible plan fiduciary should not consider any one factor, including the fees or compensation to be paid to the service provider, to the exclusion of other factors. Further, a fiduciary need not necessarily select the lowest-cost service provider, so long as the compensation or fees paid to the service provider are determined to be reasonable in light of the particular facts and circumstances.”

It may seem difficult to evaluate criteria such as conflicts of interest. However, much of that responsibility can be handled by understanding and evaluating all of the compensation being received by the service provider from all sources. For example, if the service provider receives more compensation from some investments than others, has the prospect of additional compensation influenced the service provider’s recommendation—possibly to the detriment of the participants?

The end result of these regulations will be a more prudent retirement plan for the company and it’s employees. Plan sponsors have the burden of providing their employees with a retirement savings vehicle or the government will.

Please comment or call to discuss how this will affect you and your company.

  • A Closer Look at Fiduciary Status Under ERISA (
  • What ‘Fee Disclosure’ Rules Really Mean for Plan Sponsors (
  • Who Are Your Fiduciaries? (
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How Is Your Financial Adviser Paid?

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Why should you care how your adviser is paid? Because his/her compensation can impact the choice of the products recommended to you and your return from those products. Moreover, the adviser’s compensation structure can create a conflict of interest between what is best for you the client and what is best for the adviser’s wallet.

While there are many fine financial advisers who receive all or part of their compensation from the sale of financial products, a client can never be fully sure that the adviser’s recommendations are fully made with the client’s best interests at heart. Will the adviser suggest a mutual fund that does not pay a commission even if that fund is the best one for the client?

Fee-only advisers do not have this conflict of interest because they are paid by the client, not the financial product provider. They are free to suggest the best investment vehicles and financial products for each client’s individual situation. Full disclosure: I am a fee-only adviser, and I absolutely feel this is the best compensation method for clients.

When selecting a financial adviser, be sure to understand how he or she will be paid from working with you. Compensation structure should clearly not be the only metric used when choosing an adviser. There are many questions to ask a perspective adviser. Most of all, be sure that the person that you choose to work with is competent and that he or she fully understands your situation, your goals, and your expectations from the relationship.

Conflicts of interest when dealing with a financial adviser can be minimized. Fees and risk level are two thing an investor can control. Working with a fee only adviser can help control both.

Please comment or call to discuss how this affects you and your financial future.

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