Making choices
Choosing the right investment vehicles and/or securities for your portfolio is often no easy task The many financial products available, and their varying levels of complexities, can cause angst for many investors who don’t know where to begin.
To help them make the right choices, many turn to certified financial advisors. These professionals are charged with providing their clients with the most accurate information about investment vehicles that best suit their clients’ needs.
With smiles and glee, these professionals happily take on doing all the legwork – for a fee.
Investors have long accepted the fees they must pay for the professional advice. However, many may have been unaware of the extent that some of these so-called professionals are willing to go to line their own financial coffers, at the costs of their clients.
Simply, too many financial advisors have developed the nasty practice of recommending financial products to their clients, knowing full well that the client didn’t need them. No matter, those products could result in the client having to pay higher fees, resulting in higher commissions for the advisor.
In the U.S., the government saw this happen so much that it stepped in and put in place a rule requiring that advisors act in the best interests of their clients when dispersing financial advice. Industry players cried foul, and now some of the rule’s provisions are in limbo. In the meantime, investors, especially those saving for retirement, are left to wonder what to do with the advice they’ve been peddled.
Here, we’ll discuss what to do, using this rule coming to fruition as the background.
Lining their own pockets
Clearly, not all financial advisors are in the business of peddling unneeded financial products to their clients because doing so could reap them higher returns in terms of commissions. However, the fact is that a considerable number of advisors have no qualms about using such unscrupulous practices.
In the U.S., the fiduciary rule was put in place by the federal Department of Labor to stomp out the practice. The rule includes a number of provisions that are meant to make sure that advisors act in the best interests of their clients.
The rule specifically defines fiduciaries as broker-dealers, investment advisers, insurance agents, plan consultants and other intermediaries to Employee Retirement Income Security Act (ERISA) plans and individual retirement accounts (IRAs).
At risk
Considering that these professionals’ clients include so many looking to build their nest eggs for their retirements, the thought of professionals not looking out for their best interests is disturbing. These are not short-term investors, nor are these people who are looking to trade on the next best thing. These are people who are trying to position their investment portfolios so that they can live on fixed incomes for the rest of their lives.
You may be one of them.
You, like many others, planning for retirement, high-risk investments, or investments that have long time horizons are most likely not in their best interests. Still, this has not stopped some advisors from selling them to clients. Many of these clients didn’t question what they were buying. After all, many have been taught to seek advice of professionals with the understanding that these people knew what best to recommend.
Some estimates place the amount of money loss by Americans due to conflicts of interest among financial advisors is $17 billion a year.
Unfortunately, an advisor’s greed can doom their clients’ investments. The client can easily end up spending on fees and commissions for financial products they do not need, instead of taking those same dollars and investing and/or saving toward their retirement.
Fiducial rule not enough
While this fiduciary rule will help in addressing unscrupulous advisors, it should not be seen as the solution. Even now, the rule is bogged down in government politics, and no one knows what the final version will entail when it kicks in on Dec. 31.
In the meantime, investors should take the events leading up to the rule’s creation as a reason to be diligent in doing as much research as possible on their own.
The first step is to understand exactly what you are buying. Take for example life insurance products. Many are offered with beneficial long-term features, such as payments to cover your living expenses in the event you become ill. Read the fine print. Compare the products to others on the market. Do a self-evaluation to determine if the product is something you really even need. You may already have supplemental coverage through your health insurance plan.
Then there are mutual funds. Understand what load fees are, and if any are associated with the fund you are being peddled. Financial advisors have moved away from funds that require for fees to be paid upfront, but they do still exist. Be sure to inquire about no-load funds and the cost differentials.
When your statements arrive, pore over them. Don’t just look at the return balances. Look also at the fees that have been accessed. If anything is not what you expect, immediately bring it to the attention of your advisor.
Sign up for KINFO and share your ideas and questions with the community. Chances are many others have questions about financial advisors. You can get an idea of more questions you should as your advisor, and even learn about financial products to inquire about.
The key here is to take a proactive role in the selection of financial products you need to meet your long-term investment goal. The onus is on you to go a step further and vet the advice from your advisor. Don’t just rest on your laurels, and leave it to them. This is not to say that you should be untrusting. It is to say that you should be careful. After all, this is your nest egg for retirement. You want every dollar you earn to go toward lining your financial coffers, and not lining in grand fashion, the coffers of your advisor.
