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September 2006 Free
financial planning Michael Haubrich |
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Just
recently I met with a new client who experienced “free financial planning”
earlier this year. His free planning
started with a free dinner meeting, followed by a free financial
consultation, followed by a free financial plan that ultimately ended with an
annuity sale and $9,000 in commission to the financial “consultant.” This may
not have presented an issue in other circumstances, but in this case 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 ten
percent to the “advisor” who definitely would have a self-serving interest in
striking these kinds of deals. This case
typifies what occurs far too often. In
asking the client why he bought this annuity, he responded that he “trusted
the advisor and thought she would recommend what was in my best
interest.” Sadly, consumers do not
understand the difference between investment salespeople and
fiduciaries. What is a Fiduciary standard? The
National Association of Personal Financial Advisors (NAPFA) provides the
following definition of 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.” According
to a survey conducted in 2004 by TD Ameritrade, 58 percent of consumers
wrongly believe that both stockbrokers and Registered Investment
Advisors (RIAs) have a responsibility to act in
their (the consumer’s) best interest.
Sixty-three percent believed that stockbrokers and RIAs are required to disclose all conflicts of interest
before providing financial advice. The
fact is that 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. It is
this important difference that determines a consumer’s course of action if
the recommendations do not meet up with their expectations. In a dispute, a 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” meaning that 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. How do I determine if
my advisor is a fiduciary? All financial advisors who are Registered Investment Advisors (RIAs) are held to a fiduciary standard. RIAs are registered with the Securities and Exchange
Commission (SEC) under the 1940 Investment Advisor Act. This law requires RIAs
to conduct themselves under a fiduciary standard. That means if your financial advisor is an
RIA, you have a fiduciary as an advisor.
All registered investment advisors are required to provide a
disclosure statement called a Form ADV.
This disclosure statement provides information on compensation,
conflicts of interest, length of time in business and other valuable data
about the advisor. Be sure to ask for
a copy and read it carefully in advance of purchasing any products or
services. You must also be careful to read and understand the disclaimers
included on marketing and advertising materials offered by agents and
representatives. Recent regulations put forth by the Securities and Exchange
Commission (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.” If you find this disclaimer or similar language on your account
statement, any disclosure statement from your advisor, or on your advisor’s
marketing materials, you should ask questions, obtain complete disclosure,
and determine if the relationship with the financial professional is in your
best interests. For more information,
go to www.focusonfiduciary.com
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