FAs and the Fiduciary Rule

How about a snippet or short summary so we know what the article is about?
 
First couple of paragraphs:

"Your new financial adviser has a well-decorated office, a firm handshake, and a bright smile. After an hourlong meeting, you leave with what you think is a state-of-the-art investment portfolio. You feel financially secure, taken care of.

"It’s also possible you’ve made a huge mistake. The White House under President Barack Obama estimated that Americans lose $17 billion a year to conflicts of interest among financial advisers. Wall Street lobbying groups dispute that math—and they’re right to do so. The actual dollar amount is probably much higher."

I guess I just assumed that it was easy enough to click on the link.
 
You didn't know about the forum naked link rule: to not make forum members click on a link to get a general idea of what it is about. Posters are asked to provide at least a brief summary along with the link. Quoting the article is a fine technique.
 
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The article summarizes what the issues are today with Financial Advisors in that they only need to recommend products and solutions that are "suitable" for their clients which leaves the door open for conflict of interest situations where the FA recommends a product that they get higher commissions while the client ends up paying more in fees.
The old administration had legislation that was going to force FA's to meet a fiduciary standard where they have to put their clients' interests first. The typical example would likely be that if there are two essentially equal products but one has lower fees, the FA would have to recommend the lower fee product. The argument against is that forcing FA's to meet fiduciary standards is that costs for their services will go up.
The concern is that the new administration may put a hold on/modify/rescind the legislation as part of policy to reduce regulation, etc.

Overall, I think the issue is that there isn't a generally accepted value put on financial advice. FA's obviously need to make some money but it doesn't help that there are unscrupulous FA's (just as there are bad people in every industry) taking advantage of clients. And unfortunately, fees have been hidden from customers so they there's probably an expectation that all this financial advice is free. In Canada, new rules have just been implemented to make fees more transparent and I'm sure it's going to open a lot of eyes on how much people are paying in fees.
 
YVRRocketSurgery said:
... The argument against is that forcing FA's to meet fiduciary standards is that costs for their services will go up. ...
Click to expand...
Yeah. The way I have heard the argument stated is that if FAs have to be fiduciaries, people of moderate means will not have access to FAs.

To me this is arguing that if the industry is not allowed to cheat people, those people will get no advice at all. That doesn't seem to me to be a bad tradeoff. And IMO the market will take care of the advice issue. We already are seeing it develop with the initial robo-advisor offerings and now with inexpensive personal service options on robo platforms.

I actually posted the link thinking it would not be news to very many people here but that it is a good link for us to send to our less-experienced friends.
 
In our case our FA immediately placed almost 20% of our savings in non-traded REITS. They were each sold at $10/share. Every year they were re-priced and every year they were lower. One of DW's is currently worth about $12,000 on her original investment of $25,000. Our last offer from a third party was to sell for $.17 per share. This is after 9 years. There is no way out. By selling these the FA has you committed. You can't leave.


He said his quarterly fees were reasonable, and they looked like it. What isn't transparent is the commission/high ER's/ front end loans/12b1 fees that the company he places you with provide him. This also encourages constant churning to get new fees. I was astounded that they don't do anything but pick investments based on the ones that pay them the most. These are all with companies you could invest with on your own if you chose.


After two years of this I fired him and moved my portfolio to Fidelity to manage myself. My wife stayed with him, but I watch him like a hawk. No churning, no changes. I think he knows once I pass he will get it back from my DW anyway.


edit: minor clarification
 
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Idnar7 said:
In our case our FA immediately placed almost 20% of our savings in non-traded REITS. They were each sold at $10/share. Every year they were re-priced and every year they were lower. One of DW's is currently worth about $12,000 on her original investment of $25,000. Our last offer from a third party was to sell for $.17 per share. This is after 9 years. There is no way out. By selling these the FA has you committed. You can't leave.


He said his quarterly fees were reasonable, and they looked like it. What isn't transparent is the commission/high ER's/ front end loans/12b1 fees that the company he places you with provide him. This also encourages constant churning to get new fees. I was astounded that they don't do anything but pick investments based on the ones that pay them the most. These are all with companies you could invest with on your own if you chose.


After two years of this I fired him and moved my portfolio to Fidelity to manage myself. My wife stayed with him, but I watch him like a hawk. No churning, no changes. I think he knows once I pass he will get it back from my DW anyway.


edit: minor clarification
Click to expand...
These werent Apple REITS from David Lerner Associates were they? i almost got bullied into buying them.
 
These werent Apple REITS from David Lerner Associates were they? i almost got bullied into buying them. No, they all had "Dividend" in their name, but the dividends were pretty much non-existent. They started at 6% but as soon as the price per share dropped, the dividend did too. The one I owned did ok. It went public and then I was able to sell.
 
You can always request that your FA sign a fiduciary agreement before you give them any business, if you know enough to do so. But if you don't ask, you probably are going to end up with a financial sales person, who makes their money by selling products that they earn commissions on. The fiduciary rule would have helped to alleviate this, but it appears the current administration is not ready to move forward with it. So it's still a buyer beware environment. Those who choose not to learn investments basics are highly susceptible to fraud, or at a minimum, really bad advice.
 
Idnar7 said:
snip...
He said his quarterly fees were reasonable, and they looked like it. What isn't transparent is the commission/high ER's/ front end loans/12b1 fees that the company he places you with provide him. This also encourages constant churning to get new fees. I was astounded that they don't do anything but pick investments based on the ones that pay them the most. These are all with companies you could invest with on your own if you chose.
snip...
Click to expand...

This page from SEC.GOV addresses fees.
https://www.sec.gov/fast-answers/answersmffeeshtm.html#distribution

"Some funds cover the costs associated with an individual investor’s transactions and account by imposing fees and charges directly on the investor at the time of the transactions (or periodically with respect to account fees). These fees and charges are identified in a fee table, located near the front of a fund’s prospectus, under the heading "Shareholder Fees.""

So if the funds are in SEC compliance with respect to their prospecti, the fee information is available -- at least for the funds. What the brokerage does with your account might be a different matter. My brokerage does charge an advisory fee (and it is nowhere near the 1% figure mentioned here so often) and every fee shows up on the statement as a line item -- investors should insist on this.

For a time I did have a fund or two that charged a 12b1 fee and those showed up on the statements along with a credit back from the brokerage. Not every account at every brokerage will get a credit for a 12b1 fee, though.

And I don't know about REITS. I owned some shares of one over 20 years ago, and after it went down and down, I sold the shares at a loss, but later observed that if I had held them longer I would have gotten a very respectable return. I don't have any now had have no plans to buy any in the future.

And, no, I am not an FA and I'm not trying to get you to use one. As we discuss these items, I think we should be complete, fair, and accurate. :)
 
redduck said:
Well, the heading does say: "FA's and the Fiduciary Rule." It's even in bold type.
Click to expand...
Didn't tell me hardly anything.

It's a courtesy to other forum members to give a bit of a summary so they can decide whether or not to click on the link.
 
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Idnar7 said:
These werent Apple REITS from David Lerner Associates were they? i almost got bullied into buying them. No, they all had "Dividend" in their name, but the dividends were pretty much non-existent. They started at 6% but as soon as the price per share dropped, the dividend did too. The one I owned did ok. It went public and then I was able to sell.
Click to expand...

ok, one day ill share my horror story in the forum, ty.
 
My gut tells me that sales-oriented FAs will find ways around fiduciary rules - or they will have to completely change the dynamics of the business - as someone suggested, dropping all the small customers. Of course, the big fish probably already "roll their own" financial plans so it doesn't look good - unless there is a work around to the fiduciary requirements that MAY be coming. YMMV
 
Koolau said:
My gut tells me that sales-oriented FAs will find ways around fiduciary rules - or they will have to completely change the dynamics of the business - as someone suggested, dropping all the small customers.
Click to expand...
Agreed. The leopards won't change their spots overnight. And they will figure out ways to keep feeding on the small fry. The first way this will happen is that they will not behave as fiduciaries for anything not in retirement accounts. Another idea I have read about is that they will bamboozle their clients into signing waivers. I don't know if this will work legally or not, though.

Koolau said:
Of course, the big fish probably already "roll their own" financial plans so it doesn't look good - unless there is a work around to the fiduciary requirements that MAY be coming. YMMV
Click to expand...
Well, around here it doesn't seem that a retirement portfolio north of $1M is all that rare. I don't know what you mean by "big fish" either, but $1M will get access to Series 65/66 Registered Investment Advisors who legally are fiduciaries and always have been. So no spots to change. And, unless you are a demanding and high maintenance customer, you should be able to shop and negotiate your way to a 100 basis point wrap fee on $1M. I just helped shop a $4M portfolio for a nonprofit and we got offers in the 40-60bps range. This is on top of any mutual fund fees, of course, but for someone who wants professional guidance (and help with other aspects of his/her financial life) IMO it is not too bad.
 
+1
It is not only FA's but the brokers too. One broker wanted to put me in a front loaded mutual fund, but said the no load version had higher fees. I put it into a spreadsheet and found I would never recover the front load.
Another one was pushing some QLAC annuity that was worthless for me given my age.
 
Lot of low life's in the 1% aum game. I know a few, one was a guy Megacorp finally cut, nice enough guy, but I know he had a map to find his cube. He pushes whatever Ed tells him to.

The majority of the training these folks go through isn't investing, it's sales.
 
MRG said:
Lot of low life's in the 1% aum game. I know a few, one was a guy Megacorp finally cut, nice enough guy, but I know he had a map to find his cube. He pushes whatever Ed tells him to.

The majority of the training these folks go through isn't investing, it's sales.
Click to expand...
Yes. But my point was not re 1% AUM, it was about finding a Series 65/66 Registered Investment Advisor. That's no guarantee that the guy is not dumb, but it does give the customer legal recourse and recourse against the RIA's license if the RIA does not act as a fiduciary in all respects.

Certified Financial Planners are, I am told, held to fiduciary standards by their association. That is A Good Thing, but it is not the same as having the rules enforced by the courts and by FINRA and the SEC. I'm pretty sure a Series 7 broker can be a CFP.

My guess is that a majority of RIAs do come out of the Series 7 self-interested broker world, but I have also seen some who came out of the accounting/CPA world as well. Just as any other important decision, the customer has to shop well and carefully. Series 65/66 is not a guarantee; it is a qualification.
 
YVRRocketSurgery said:
The article summarizes what the issues are today with Financial Advisors in that they only need to recommend products and solutions that are "suitable" for their clients which leaves the door open for conflict of interest situations where the FA recommends a product that they get higher commissions while the client ends up paying more in fees.
The old administration had legislation that was going to force FA's to meet a fiduciary standard where they have to put their clients' interests first. The typical example would likely be that if there are two essentially equal products but one has lower fees, the FA would have to recommend the lower fee product. The argument against is that forcing FA's to meet fiduciary standards is that costs for their services will go up.
The concern is that the new administration may put a hold on/modify/rescind the legislation as part of policy to reduce regulation, etc.

Overall, I think the issue is that there isn't a generally accepted value put on financial advice. FA's obviously need to make some money but it doesn't help that there are unscrupulous FA's (just as there are bad people in every industry) taking advantage of clients. And unfortunately, fees have been hidden from customers so they there's probably an expectation that all this financial advice is free. In Canada, new rules have just been implemented to make fees more transparent and I'm sure it's going to open a lot of eyes on how much people are paying in fees.
Click to expand...


The suitability vs fiduciary argument is a non issue . .this is just a smoke screen to make you think that your FA no longer has a conflict of interest.. THIS IS A BUSINESS... no matter how your FA gets paid .. there will be a conflict of interest.. the one you should probably stay away from are the ones that tell you that there are none. You still have to vet your FA and find someone you can trust.. trying to avoid a conflict of interest is a losing proposition .. so is the fiduciary rule
 
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