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The Best Intentions

The Best Intentions

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At a previous employer, we were committed to the phrase “trust in the good intentions of others.”  When I used these words recently in a conversation others at the table looked at me as if I was from Mars.  “C’mon,” said an older gentlemen, “you don’t really believe that, do you?’ After thinking about it, I had to admit that I do believe it.  Should I?  Probably not, especially after hearing all the stories about the poor intentions of “financial advisers” who have done so much damage to their clients.

The Fiduciary Rule, put in place by the Department of Labor, is supposed to make sure you are protected from myriad advisers who provide advice that gives the adviser a healthy paycheck and the often-vulnerable client expensive investments with large commissions. However, it’s doubtful the new rule will give investors the protection they really deserve. The reality is that you’ll still need to protect yourself.  Let me give you a couple of examples of why.

A woman in her late 60’s came in recently.  She was newly retired and wanted us to review her financial situation as her IRA portfolio had been designed by a “friend” who worked for a major brokerage.  Our “second opinion” quite surprised her.  Her retirement portfolio was laden with expensive actively managed mutual funds but also contained numerous non-traded real estate investment trusts (REITs). These were sold without mention of the huge upfront commissions (9 percent) high fees, lack of liquidity and, if you believe relevant industry studies, lower performance than REIT index mutual funds.  We hate to deliver this kind of news to people, especially when they have been helped by someone they considered “a friend.”  Her question: would the new fiduciary rule allow this product to be sold to her?  Sadly, the answer is yes.  The “Best Interests Contract Exemption” (BICE) will enable financial advisers to continue to sell commission products, if the client agrees to sign it.

Commissions are an ever-present incentive to betray the trust of clients.  Take the case of a 71 year old man who took his entire 401(k) and rolled it into an indexed equity annuity.  These complex products, which pay out commissions of up to 10%, are promoted as providing the owner the returns of the stock market with none of the downside risk.  He was surprised to learn that he has a paid a commission of about $43,000 which he would have to pay back as a huge surrender fee if he wanted out in the next several years. He had no idea that he would be paying about 3% a year in various fees.  

Again, this gentleman was surprised that his insurance agent would move his retirement fund to this product.  He wasn’t happy to know that the practice could continue with the new DOL Rule, as long as BICE was signed by the client.

How can your really protect yourself?  First, only hire fee-only Registered Investment Advisers.  Dually registered advisers (those who are also stockbrokers or insurance agents) can still sell products that may not be in your best interests.  Second, only use low-cost index or index-style mutual funds that should give the actual returns of the market. Finally, don’t necessarily believe your “friends,” as your relationship with your financial adviser should be a business relationship, not a personal one. 

The phrase, “trust your broker” has been a punchline for several decades.  Unfortunately, even with the new DOL rule, you will continue to hear it (and the accompanying guffaws) for some time.

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The Story of Indexing