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There’s a new rule that requires advisors who offer investment advice to retirement savers to be fiduciaries, meaning they put their clients’ best interests ahead of their own potential commissions.
A non-fiduciary advisor merely must make sure that an investment is suitable for you, which leaves the door wide open for a lot more potential conflicts of interest. That’s because many brokers and other non-fiduciaries are incentivized to sell you investments that generate fat commissions, whether or not the investments are in your best interest. This new rule comes from the Department of Labor, and it’s a huge step to empower individual investors and save them billions of dollars.
According to the DoL, the White House Council of Economic Advisers estimates that U.S. consumers waste $17 billion every year on outrageous fees paid to advisors.
The fiduciary rule won’t go into effect until April 2017, but now is the time to begin arming yourself with the information you need to verify your advisor is on your side. Once the new rule kicks in, a lot of financial advisors will jump on the bandwagon to claim they are fiduciaries, even if they or the firms where they work aren’t.
Remember Bernie Madoff? He too claimed he was a fiduciary investment advisor. But the reality is, it doesn’t take a sociopath to bilk you out of your retirement savings. There are plenty of perfectly legal (though often unethical) ways for advisors to help you lose your money.
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Even comedian John Oliver poked fun at non-fiduciary financial advisors in his eye-opening monologue video (posted on Newsweek) outlining all the ways sleazy advisors leech off clients’ retirement savings by selling investments with huge fees that clients didn’t even know they paid.
Financial advisors may “pinky swear” that they meet the higher fiduciary standard, but these five questions will help you ascertain who’s a fiduciary and who’s giving you a slick sales pitch.
1. Are you really a fiduciary advisor—can I have it in writing please?
If the advisor you’re considering hiring isn’t willing to state this in writing, run the other way.
2. How am I paying you?
Commission-driven brokers or advisors earn most of their income by selling certain funds, annuities or other investment products. Sales charges for these types of brokers or advisors can run 3% to 6% off the top of your investment. Sometimes the company whose product they are pitching pays their commission as a “marketing expense” in what basically amounts to a kick-back. The problem with this is that commissions create a conflict of interest for the advisor because they have a huge incentive to recommend the option that pays them the most—whether or not it is really the best investment for you. Some advisors are basically just high-paid salespeople, so transparency is the hallmark of a real fiduciary advisor.
3. How much will your advice cost me?
No one expects free advice, but a fiduciary advisor is willing to put in writing all the fees and expenses associated with the relationship, and many will be happy to provide you with a good faith estimate of what your typical yearly expenses will be. This includes all the expenses incurred whenever buying or selling an investment.
4. Who is the custodian for your clients’ accounts?
This question will help you protect yourself because this is how Bernie Madoff was able to get away with fraud. His clients wrote their investment checks directly to a brokerage that was also owned by him, which meant there was no third-party verification in place to protect them. A real fiduciary advisor makes sure your money is held by a recognized custodian such as Schwab, TD, Fidelity, or another big name.
5. May I see your background records?
You probably check your dog sitter’s references, so what about your advisor’s records? A good fiduciary advisor is more than willing to make everything available, but you can check his background yourself in less than 15 minutes. Just visit FINRA’s BrokerCheck site and the SEC’s Investment Advisor Public Disclosure site and enter the individual’s name and/ or the name of the firm. He should be willing to give you his CRD (Central Registration Depository) number to make the searches even easier.