This post is a preview of WorthPointe’s e-book Evidence-Based Investing: Separating Fact From Fiction, written by Certified Financial Planner™ Scott O’Brien. In Evidence-Based Investing, Scott discusses the myths and misinformation that most often slow or halt our financial goals. Get your complimentary copy of Evidence-Based Investing here.
A fellow falls in a hole and can’t escape. He calls for help and a man arrives. The new man says, “I’ll go for help.” And he leaves.
Another man arrives and tosses down a rope, but it’s too short to reach the fellow in the hole, so he leaves, too.
A third man arrives and jumps into the hole.
“Why did you do that?” the trapped man cries. “Now we’re both in the hole!”
“Don’t worry!” the new man exclaims. “I’ve been here before, and I know the way out.”
Your advisor should serve as a fiduciary. I call this the “F” word. For your family’s sake, you should only deal with an investment advisor who is a fiduciary. By law, a fiduciary is a person who has to put your interests above his own. For example, attorneys and CPAs work under this level of responsibility.
You should know that a financial advisor, financial planner, investment representative, or whatever they call themselves these days at the nation’s stock brokerage firms, banks or insurance companies, will most likely not work as a fiduciary. They operate under a “suitability” standard.
The suitability standard, which is a much lower standard than a fiduciary and is much easier to legally meet, means the advisor has determined the investments he is recommending are “appropriate” for you. For example, the advisor could legitimately argue that a retiree who desires more income would be “suitable” for an annuity product.
However, the advisor could recommend an annuity that paid him a higher commission or allowed him to win a trip for meeting a sales goal — even if it wasn’t the best annuity for you.
Despite its “feel good” advertising, the brokerage industry is not really on the side of the regular investor. You only need to witness the government lawsuits against Wall Street powerhouse firms such as Goldman Sachs to understand this point.
As an advisor, it’s hard to see how Goldman Sachs acts as a fiduciary with its clients. In fact, one of its arguments in pleading its case was that their advisors weren’t acting as fiduciaries when dealing with some of their clients. So Goldman Sachs doesn’t even pretend to be on the side of the client when involved in litigation.
Fortunately, there is an easy way to deal with the fiduciary situation. Just don’t deal with anyone who won’t agree in writing to act in a fiduciary capacity when advising you on your financial matters.
Advisors who work for Registered Investment Advisor firms are covered under the Investment Advisors Act of 1940, so they must act in a fiduciary capacity with their clients. Financial advisors who work at brokerage firms, banks and insurance companies most likely will not have that obligation.
Always ask the advisor how he is compensated. I’ve heard a number of radio show hosts claim that “an investor doesn’t pay anything we get paid from the insurance company.” While this line may be technically correct, don’t be fooled. The “advisor’s” (salesperson’s) compensation comes indirectly from your investment.
Read the rest in Evidence-Based Investing. Get Your Complete Copy of the Book Now.
Other articles filed under Austin CFP Team Posts
October 17, 2017 - I would like you to think about something. What is your biggest roadblock to being free from financial anxiety and uncertainty? You’re experienced. You’re knowledgeable. You have an idea of what you want and you have occasions where you are...
October 8, 2017 - Morgan Smith has been named a finalist for San Diego Business Journal’s Military & Entrepreneur Awards. This new awards program and educational conference will be held at the Hyatt Regency La Jolla at Aventine, 3777 La Jolla Village Drive, on...
September 18, 2017 - [embed]https://www.youtube.com/watch?v=gO5Gj-N9yg4&t=5s[/embed] “Mindfulness doesn’t do any good unless there’s discipline attached to it.” We became financial advisors first and foremost to provide our clients with fulfilled, happy lives. Austin Partner Morgan H. Smith discusses the important role that mindfulness plays in...
September 8, 2017 - The IRS has just announced some relief for certain verification procedures for those needing to take hardship loans and distributions from their qualified retirement plans due to Hurricane Harvey. In IRS Announcement 2017-11, the IRS lays out the rationale and...
July 17, 2017 - I’m always surprised where my inspiration comes from for my quarterly reviews. This quarter it comes from a photo of my 3-year-old son getting his first official military salute from Vice Admiral Mike Shoemaker, who was the Grand Marshall for...
- VIDEO: Should I Buy a House?
- 5 Ways Rising Interest Rates Matter to You