25 June 2019

How to Get Conflict-Free Retirement Advice

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Some steps to make sure you get the best fiduciary advice if the government doesn’t help

When President Donald Trump ordered a review of the Labor Department’s fiduciary rule for possible revision or repeal, he put into doubt the government’s commitment to ensuring that all retirement savers get advice that is in their best interest.

The Labor Department on Thursday filed a formal notice seeking delay of the regulation beyond April 10, when it was to go into effect. But you may still want a fiduciary level of oversight for your individual retirement accounts and other investments. After all, a fiduciary is required to act in clients’ best interest rather than under the lower standard of suitability that has governed certain financial professionals for decades.

Here’s what you can do to make sure you are getting the most beneficial advice.

Understand the Sector 

While most financial professionals call themselves “advisers,” there are different types of advisers that are regulated under different laws and held to different standards. As a result, the degree to which any given professional advice giver must put a client’s interests before his or her own varies.

“It remains extraordinarily difficult for investors to figure out who is acting in their best interests and who isn’t,” said Barbara Roper, director of investor protection at the advocacy group Consumer Federation of America.

Advisers come in two basic flavors: registered investment advisers, or RIAs, and brokers, who are also known as registered representatives. RIAs are legally bound to serve as fiduciaries. To minimize conflicts, they are typically paid a fee by clients and avoid mutual funds, annuities and other products that offer them sales incentives.

Brokers, on the other hand, are allowed to recommend products that pay them the most in commissions and other incentives as long as the product suits the client’s needs, a practice the fiduciary rule would restrict.

To ascertain whether an adviser is a fiduciary, simply ask, said Deena Katz, a professor of personal financial planning at Texas Tech University. If you get an unclear response, ask the name of the adviser’s regulator. The Securities and Exchange Commission and state securities regulators oversee RIAs, while the Financial Industry Regulatory Authority regulates brokers.

Check for Conflicts 

Just because an adviser is a fiduciary doesn’t mean he or she has no conflicts.

To ferret out conflicts, it is important to ask the advisers how they are compensated and how they manage the ethical dilemmas that arise as a result of their fee arrangement.

For example, most RIAs charge clients a percentage of their account balance for financial planning and investment management that typically amounts to 1% a year. Clients need to be aware that such advisers stand to make more money by, say, recommending that clients refrain from paying down mortgages or giving money to their children, said Ms. Roper. Advisers are required to disclose such conflicts to the client and should also present both a recommendation and alternatives.

More fiduciaries try to reduce the potential for conflicts of interest by charging an hourly rate or flat monthly or annual retainer fees. Advisers who charge such fees are “indifferent as to whether the client puts money into their business, real estate, or investments,” said Jacob Kuebler, an adviser in Champaign, Ill., who charges an annual retainer fee.

But such fee arrangements create conflicts of their own. For example, the hourly rate creates an incentive for advisers to “work as slowly as possible,” said Sheryl Garrett, founder of Garrett Planning Network, which has 250 members who charge an hourly fee for financial planning. Ms. Garrett recommends asking for a written estimate of the total cost and setting a deadline.

Also be aware that advisers at brokerage firms may be “dually registered,” which allows them to serve as both a broker and an RIA. To avoid situations in which a dually registered adviser may work for you as a fiduciary when preparing a financial plan but as a broker when recommending investments, ask whether he or she will serve as a fiduciary for you at all times, said Ms. Katz.

WSJ Finding Fiduciaries 2_13_17 

Know What You Want 

If you’re looking for a fiduciary, the good news is the number of such advisers is increasing. And while fiduciaries have historically focused on clients with six figures or more to invest, more now work with clients of lesser means, using a variety of arrangements.

Those who want a lot of hand-holding should hire an adviser on a continuing basis. Traditionally, this has meant paying an adviser 1% or so of your account balance annually for financial planning and investment management, with investment-related fees on top.

Most advisers who charge a percentage of assets under management typically require a minimum portfolio size, said Geoffrey Brown, chief executive of the National Association of Personal Financial Advisors, which has more than 2,800 members, all of whom are fiduciaries.

Those with smaller nest eggs, or who prefer to use a different compensation arrangement, have an array of choices.

The 355 advisers in the XY Planning Network specialize in clients in generations X and Y, who typically have incomes of $60,000 or more. The advisers charge a monthly subscription fee that often ranges from $100 to $200 for financial-planning advice. The Alliance of Comprehensive Planners has about 150 members who charge a flat annual retainer fee for financial planning and tax-related advice based on a client’s annual income or net wealth, said Mr. Kuebler, a former board member.

Those who want a more limited engagement may benefit from hiring a planner on an hourly basis.

Garrett Planning Network’s members charge an hourly fee for financial planning—$180 to $300 is typical.

Many clients pay a few thousand dollars for a financial plan and then schedule periodic updates as needed, said Ms. Garrett, who said clients can choose to pay the planner an asset-based fee to manage their investments or simply manage the portfolio themselves.

The advantage, she added, is that clients pay for no more than they need.

Before hiring any adviser, make sure his or her expertise matches your needs. At a minimum, most advisers provide financial planning and investment management. But some firms specialize in a particular type of client, for example, technology executives with pre-IPO stock or small-business owners with estate, tax and succession planning needs.

Check the adviser’s disciplinary history on Form ADV filed with the SEC and look for professional credentials that require extensive training and experience, such as the certified financial planner designation.

With or without the fiduciary rule, it is in your best interest to ensure you are getting a high standard of care for your retirement assets.

Click here for the original article from Wall Street Journal.

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