By Haddon Libby
Is your financial advisor truly a “trusted” advisor looking out for your best interests or a biased salesperson?
That was the question posed by the Consumer Federation of America, a consumer advocate group. What was their finding? Most of those in the financial and insurance industries are biased salespeople.
People expect salespeople to put their interests first. Think about the last time you bought a car….didn’t the salesperson try and pad the cost of the car with extras that you did not really need?
Herein is the problem with the financial industry. The term ‘financial advisor’ means nothing. Even most of those accreditations denoted by letters after your advisor’s name do not tell you if you are dealing with a biased salesperson. The real question is whether you can hold your advisor accountable for whatever it is that they are selling to you. In most cases, you cannot.
If you want to hold your advisor accountable, you should only use those who represent themselves as a fiduciary. The difference between a financial advisor and a fiduciary is that the fiduciary must put your interests first and can get in trouble if they put their interests ahead of yours.
Given that fewer than 10% of all financial advisors are fiduciaries, you need your financial advisor to put in writing that they act as a fiduciary when serving you. If you cannot get it your advisor and their firm to state in writing that they act on your accounts as a fiduciary, assume that you are dealing with a biased salesperson.
Some of the tricks of the trade include putting you in high cost mutual funds that make back-end payments to them without your knowledge. Variable rate annuities are another product that typically benefits your salesperson more than you. Very few fiduciaries will recommend this type of product.
Additionally, if your 401k plan includes an insurance company, there is a sizable chance that you are overpaying for sub-optimal results.
After six years of negotiations with Wall Street and in the waning days of the Obama Administration, the Department of Labor set into place something called the Fiduciary Rule.
On June 9th, this Fiduciary Rule partially took effect. The rule requires that financial advisors act in the best interests of clients on retirement accounts only. On non-retirement accounts, these firms and their advisors can continue to operate as biased salespeople. It is estimated that the Fiduciary Rule with cost the financial industry $17 billion. More importantly, investors will earn at least $17 billion more in returns because of the rule.
The biggest impact of the rule is that all financial advisors managing retirement accounts must act as fiduciaries and put a clients’ interest ahead of their own interest. Given that 90% of the industry has never behaved in this matter, the rule is a big deal to those advisors and their brokerage firms as they can now be sued for acting as biased salespeople.
While this sounds like a victory for consumers, the Trump Administration is reviewing the rule and is expected to water down or scrap the few consumer protections in the ruling. Until the review is complete, compliance with the rule is on a ‘honors’ basis with no real penalties for non-compliance. This means that consumers need to remain aware that there is a very high probability that their advisor is still behaving as a biased salesperson in fiduciary clothing.
What should a consumer do?
Get second opinions from financial advisors who hold themselves out as fiduciaries. Ideally, you want to work with individuals and firms that do not operate as brokers. At minimum, you want them to state in writing that they operate as a fiduciary on your behalf.
By working with salespeople instead of fiduciaries, there is a very real chance that much of the returns on your investments are enjoyed by the salesperson at your expense.
Haddon Libby is Managing Director of Winslow Drake Investment Management. Winslow Drake does not operate as a broker and holds itself out as a fiduciary. As such, call us for a second opinion! We don’t bite. Worst case, you will learn whether you can trust your investment advisor or not. As such, call us at (760) 449-6349 or email me at HLibby@WinslowDrake.com.