Finding a trusted advisor to partner with in managing your savings can be a daunting task, there are several attributes of that advisor and your relationship that should be taken into consideration. One of the most frustrating aspects of the search is the difficulty in determining the answer to the simple question “Will I be treated fairly?” The challenge in answering this simple question was emphasized in a recent NY Times article titled, “The Finger-Pointing at the Finance Firm TIAA.” We will highlight certain areas of the article below and suggest that you read the article for yourself, however the basis of the article is that a “whistle-blower complaint by a group of former workers — say it pushes customers into products that do not add value and may not be suitable but that generate higher fees.” There are a few questions to ask your advisor or prospective advisor that make sense in light of these most recent allegations.
- Are you a fiduciary?
The answer should be, “Yes, we act as your fiduciary 100% of the time.”
The fiduciary standard stipulates that an advisor must place his or her interests below that of the client. It consists of a duty of loyalty and care, and simply means that the advisor must act in the best interest of his or her client. Do not assume that an advisor is a fiduciary since most are not. In fact, most of the big Wall-Street firms are fighting a proposal requiring them to act as a fiduciary. The article states, “A new federal fiduciary rule, which will require financial advisers working on retirement accounts to put their clients’ interests first, states that firms like TIAA cannot use bonuses or other incentives that would cause advisers to make recommendations that are not in the best interest of the retirement investor.” Along with many on Wall Street, TIAA argued against the fiduciary rule. This is not a TIAA problem, this is an industry problem as the Times notes: “Pushing customers into investment products to generate higher pay is a tactic as old as investing itself. And many Wall Street firms, JPMorgan Chase and Morgan Stanley among them, have gotten into trouble for aggressive sales practices. TIAA, by contrast, has been seen as a different animal from its Wall Street counterparts.”
- How are you compensated? Does your compensation increase depending on the investments that you recommend?
We believe that the answer to this should be: We are Fee-only advisors. Our compensation is derived 100% from our clients, we earn no other compensation and have no other conflicts of interest. The other common types of compensation that we believe to be inferior are fee-based and commissioned.
The problem with fee-based and commissioned relationships is that fees are not always transparent and brokers may be more handsomely compensated depending on the investments that they recommend. If the advisor is not a fiduciary, they can legally recommend higher cost investments that compensates them more to the detriment of the client. In this case the lines were further blurred because TIAA touted the fact that their advisors are salaried employees but did not make it as obvious that they would receive bonuses based on what they recommended. “Although TIAA contends that its sales representatives are not paid commissions, it does award bonuses to financial consultants and advisers if they sell in-house products or services. “There is an incentive for consultants to refer you to, or recommend that you open, TIAA accounts, products and services,” one TIAA filing with the S.E.C. said. According to internal and S.E.C. documents, TIAA advisers receive more money if they put clients into what the company calls complexity products — in-house offerings like annuities and life insurance as well as costlier private asset management accounts and fee-based Portfolio Advisor accounts.”
There are several other questions to ask a prospective advisor but when it comes to being treated fairly, working with a fee-only advisor that serves as a fiduciary is a good start. You can read more about this topic on our blog here. At Blue Bell PWM, we have always been fee-only advisors and have always acted as a fiduciary 100% of the time for our clientele.