Your Best Interest...NOT!!
March 21st, 2008 at 04:09 pmThere's a lot of talk about doing what is in the 'client's best interest' when it comes to financial advice. But when I saw what 'financial advisors' were doing to people, I started seriously questioning what it means when a 'financial advisor' says he is a 'fiduciary' and acts in the 'client's best interest at all times'.
From what I dug up, when it comes to financial advice 'fiduciary' pretty much means nothing except that legally an RIA has to disclose his conflicts of interest, not verbally and with clear explanation, only in print (which most clients don't read and/or understand). If the 'financial advisor' isn't registered as an RIA, then all bets are off.
Here's how this is worded:
"Federal and state law requires that Registered Investment Advisors are held to a Fiduciary Standard. This law requires that an advisor act solely in the best interest of the client, even if that interest is in conflict with the advisor’s financial interest."
But read on: "Investment Advisors must disclose any conflict, or potential conflict, to the client prior to and throughout a business engagement."
This is a glaring contradiction!
Ameriprise, for example, claims their 'advisors' fall under the fiduciary
standard. However, they are involved in 'revenue sharing' - a practice where they get kickbacks for recommending certain funds.
"...certain aspects of our relationship with the fund families in the Program may create conflicts of interest or incentives
for Ameriprise Financial to promote, and for an advisor to recommend, a fund from a family that participates in the Program over a fund from a family that does not participate in the Program. In addition, among fund families participating in the Program, we generally have a greater incentive to offer funds from Full Participation Firms than funds from Limited Participation Firms. As further described below, these conflicts and incentives may arise from the marketing and sales support provided to our financial advisors by, as well as the payments we receive from, fund families participating in the Program, and our other relationships with fund families, including our affiliation with the RiverSource Investments family of funds."
http://www.ameriprise.com/amp/global/docs/8020.pdf
This way of doing business made me wonder if 'fiduciary' applied when a general plan was being written but did not apply when the selling started. I think this might be the case but can't get to the bottom of it.
But, per the above, it really doesn't matter: A 'Fiduciary' does not have to do what is in the client's best interest if he simply discloses somewhere that he has conflicts of interest. Ameriprise clients usually don't know they are paying any fees at all, let alone know about and understand 'revenue sharing.
I don't think paying a 1.5% (or even 1%) wrap fee year after year after year is in the client's best interest. Most of the work is done the first year. And that wrap fee comes off the TOTAL assets under management, not just gains. The 'financial advisor' will NEVER, EVER show the client a chart like this one:
http://www.retireearlyhomepage.com/advise.html
A 'financial ADVISOR' should be showing his client this chart and keeping fees as low as possible. Otherwise, calling himself a 'financial ADVISOR' is simply fraud, IMO.
I also wondered how a broker/financial advisor/planner could do what is in the client's best interest if he doesn't have a firm grasp of how to properly invest. I've seen many portfolios set up by RIAs - and none of these portfolios had index funds, just expensive, actively managed funds. That's not in the best interest of the client. Asset allocations were poorly done. Some people had been sold complex and very expensive variable universal life (VUL) policies when they hadn't maxed out other tax-advantaged accounts. The advisor was either dishonest or ignorant.
Then I found this: "I am a Registered Investment Advisor (RIA) with the Securities and Exchange Commission. Are you impressed? Don’t be. Just about anyone can become an investment advisor. Simply send in a form to the state or federal government with a modest filing fee, and you can join the club. You don’t need an MBA or a college diploma to apply. Heck, you could have flunked out of the third grade, gone bankrupt seven times, lost everything you ever owned to a Ponzi scheme, and still make a great living managing other people’s money.
In this surreal world of investment advice anyone can claim to be an expert and get paid for it. This is why most stockbrokers, financial planners, and insurance agents are in the business, and why accountants, attorneys, and bankers want in as well. The problem is, most investment advisors are borderline incompetent. Thousands of them lack the basic investment skills and knowledge of a first-year business
student." - Rick Ferri
That cleared it up even more and I realized that 'client's best interest'
begged the question of the 'advisor' even having a clue what was in the client's best interest!
The final 'ah ha' moment came when I read this:
"In essence, the talk about ethics, fiduciary responsibility, integrity, etc. is primarily a marketing gimmick designed to lull the unsuspecting client into the perception of trust." (EF Moody, PhD, MSFP, LLB, MBA, BSCE, CFP)
It put words to what I was thinking based on a LOT of research.
So much for 'fiduciary'.
My free website: www.saveyournestegg.com
From what I dug up, when it comes to financial advice 'fiduciary' pretty much means nothing except that legally an RIA has to disclose his conflicts of interest, not verbally and with clear explanation, only in print (which most clients don't read and/or understand). If the 'financial advisor' isn't registered as an RIA, then all bets are off.
Here's how this is worded:
"Federal and state law requires that Registered Investment Advisors are held to a Fiduciary Standard. This law requires that an advisor act solely in the best interest of the client, even if that interest is in conflict with the advisor’s financial interest."
But read on: "Investment Advisors must disclose any conflict, or potential conflict, to the client prior to and throughout a business engagement."
This is a glaring contradiction!
Ameriprise, for example, claims their 'advisors' fall under the fiduciary
standard. However, they are involved in 'revenue sharing' - a practice where they get kickbacks for recommending certain funds.
"...certain aspects of our relationship with the fund families in the Program may create conflicts of interest or incentives
for Ameriprise Financial to promote, and for an advisor to recommend, a fund from a family that participates in the Program over a fund from a family that does not participate in the Program. In addition, among fund families participating in the Program, we generally have a greater incentive to offer funds from Full Participation Firms than funds from Limited Participation Firms. As further described below, these conflicts and incentives may arise from the marketing and sales support provided to our financial advisors by, as well as the payments we receive from, fund families participating in the Program, and our other relationships with fund families, including our affiliation with the RiverSource Investments family of funds."
http://www.ameriprise.com/amp/global/docs/8020.pdf
This way of doing business made me wonder if 'fiduciary' applied when a general plan was being written but did not apply when the selling started. I think this might be the case but can't get to the bottom of it.
But, per the above, it really doesn't matter: A 'Fiduciary' does not have to do what is in the client's best interest if he simply discloses somewhere that he has conflicts of interest. Ameriprise clients usually don't know they are paying any fees at all, let alone know about and understand 'revenue sharing.
I don't think paying a 1.5% (or even 1%) wrap fee year after year after year is in the client's best interest. Most of the work is done the first year. And that wrap fee comes off the TOTAL assets under management, not just gains. The 'financial advisor' will NEVER, EVER show the client a chart like this one:
http://www.retireearlyhomepage.com/advise.html
A 'financial ADVISOR' should be showing his client this chart and keeping fees as low as possible. Otherwise, calling himself a 'financial ADVISOR' is simply fraud, IMO.
I also wondered how a broker/financial advisor/planner could do what is in the client's best interest if he doesn't have a firm grasp of how to properly invest. I've seen many portfolios set up by RIAs - and none of these portfolios had index funds, just expensive, actively managed funds. That's not in the best interest of the client. Asset allocations were poorly done. Some people had been sold complex and very expensive variable universal life (VUL) policies when they hadn't maxed out other tax-advantaged accounts. The advisor was either dishonest or ignorant.
Then I found this: "I am a Registered Investment Advisor (RIA) with the Securities and Exchange Commission. Are you impressed? Don’t be. Just about anyone can become an investment advisor. Simply send in a form to the state or federal government with a modest filing fee, and you can join the club. You don’t need an MBA or a college diploma to apply. Heck, you could have flunked out of the third grade, gone bankrupt seven times, lost everything you ever owned to a Ponzi scheme, and still make a great living managing other people’s money.
In this surreal world of investment advice anyone can claim to be an expert and get paid for it. This is why most stockbrokers, financial planners, and insurance agents are in the business, and why accountants, attorneys, and bankers want in as well. The problem is, most investment advisors are borderline incompetent. Thousands of them lack the basic investment skills and knowledge of a first-year business
student." - Rick Ferri
That cleared it up even more and I realized that 'client's best interest'
begged the question of the 'advisor' even having a clue what was in the client's best interest!
The final 'ah ha' moment came when I read this:
"In essence, the talk about ethics, fiduciary responsibility, integrity, etc. is primarily a marketing gimmick designed to lull the unsuspecting client into the perception of trust." (EF Moody, PhD, MSFP, LLB, MBA, BSCE, CFP)
It put words to what I was thinking based on a LOT of research.
So much for 'fiduciary'.
My free website: www.saveyournestegg.com
