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Client’s best interests should always come first, financial advisors say


A new U.S. Department of Labor (DOL) regulation requires advisers to 401(k) and IRAs to act in their clients best interests. Supporters argue that the measure is needed to protect people’s retirement savings from being eroded by high-fee products recommended by financial advisers. Opponents are concerned the rules are too complex making compliance difficult and expensive.

The DOL expanded its “fiduciary” definition to include brokers and other investment advisers who previously avoided, or claimed to avoid, being fiduciaries, said Stacey Wall, CEO of Pinnacle Trust, Madison.

“The Employee Retiree Income Security Act (ERISA) and the Internal Revenue Code impose fiduciary responsibilities and prohibitions on those who have or exercise any discretionary authority regarding plan administration or the management or disposition of plan assets,” Wall said. “Fiduciary status also extends to anyone who renders investment advice regarding plan or IRA assets and receives direct or indirect compensation as a result. This last category is the focus of the new rules, which will require changes to most investment advisers’ relationships with plan fiduciaries, plan participants and IRA owners.”

Wall said covered advice includes not only recommendations regarding the acquisition, holding and disposition of plan or IRA assets, but also suggestions about investment policies, portfolio composition, taking (or not taking) rollovers or distributions from a plan or IRA, and the reinvestment of such proceeds. Recommending other persons to provide investment advice or management services is also covered.

“Currently, there are two standards that advisers and financial planners are held to–the suitability standard and the fiduciary standard,” Wall said. “The suitability standard gives advisers the most wiggle room. It simply requires that investments must fit clients’ investing objectives, time horizon and experience. And you don’t have to disclose your conflicts of interest. You don’t have to appropriately manage your conflicts of interest or minimize your conflicts of interest. So what that means is often the products that are best for the broker have higher costs for the investor.”

The fiduciary standard basically charges advisers with putting their clients’ best interest ahead of their own. For instance, faced with two identical products but with different fees, an adviser under the fiduciary standard would be compelled to recommend the one with the least cost to the client, even if it meant fewer dollars in the company’s coffers–and his or her own pocket, Wall said.

“Unfortunately, many investors can’t distinguish among financial planners and advisers,” Wall said. “Studies have shown that individual investors don’t know who is a fiduciary or what a fiduciary actually is. As a trust company, we’ve always acted as fiduciaries. It’s a role we’re quite comfortable with and have a lot of experience at. While government oversight can often be overwhelming and very costly to implement, in this case we welcome the additional scrutiny because we believe it will be best for investors. It’s important that people get the very best advice because saving for retirement is so critical.”

Scot Thigpen, president of the Thigpen Group Wealth Advisors in Jackson, agrees that a client’s best interests must always come first.

“When a rule comes out that states that advisors and institutions must provide advice in the client’s best interest, avoids misleading statements, ensures for reasonable compensation, and discloses conflicts of interest and costs, I am in favor of it,” Thigpen said. “I think the biggest benefit of the rule is really creating public conversations about retirement planning and about expenses and investment advice. I have been in the investment industry for 25 years. I prefer the fee-only approach because it eliminates the potential inherent conflict of interest associated with high-fee products.”

Thigpen has seen many different references or statements about what a client paid to be in one investment product versus another. However, most illustrations seem to be overly simplistic in my mind. Most of the references are solely based on expenses and do not take into account the return on investment.

“I do believe that many consumers have little to no idea of how much they are paying when high-fee products are being sold,” Thigpen said. “I have seen high-fee products that pay commissions upwards of 5 to 8 percent.”

He sees many advisor migration towards a fee-based or fee only model.

“There are two regulatory models for providing investment services,” Thigpen said. “There is the broker-dealer model, which has traditionally been commission or transaction based. And there is also the investment advisor model, which is the type of model of my firm. There are pros and cons of both. For my clients and my business, I prefer to charge a percentage of assets under management.”

The rule is complex, and Thigpen believes that better coordination between the Financial Industry Regulatory Authority and the Security and Exchange Commission would have been best.

“For many large firms, especially the mainstream brokerage firms, this is likely to cause a complete overhaul of the services they deliver, and how the services are delivered,” Thigpen said. “There is a large segment of the industry that is concerned that these changes will mean that firms do not actually engage with small retirement plan owners such as IRAs. Since the liability could potentially be great when providing services to these small clients, they won’t provide any but the most basic operational services.”

It is important for clients to fully understand what they are paying for. Thigpen recommends asking your financial advisor to go over it with you so that you understand completely what you are paying for whether it be fund fees, transaction fees, administrative fees or the advisor fees. If your portfolio has individual stocks, do you pay someone commissions? Does the custodian charge a fee, and for what? And just don’t ask about the fees. Make sure you have a clear discussion about the actual investments in your portfolio and the overall investment strategy.

“I think the important thing about this is a rule has been enacted by the DOL,” Thigpen said. “The DOL has traditionally been involved in large pension plan oversight, and not smaller retirement planning accounts. Investors should consider their investment goals, the overall recommendation or strategy that advisor suggests, and then examine all the fees and expenses.  This includes not just the investment advisor fee, but the fees that I think may be at the root of this ruling: the level of expenses incurred by the actual investment itself.  And then look at the net returns gross returns.”


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