Saturday, March 5, 2011

Find out if your financial advisor is a "Fiduciary"

Recently at a party, I was speaking to a lady about what she was planning to do as she retired, and she said, first find an financial adviser who is a "Fiduciary".  She went on to say how she almost lost a lot of money because she was told to purchase a variable annuity. I was thinking, so what? Variable annuities are very good vehicles when put in the right situation.  She explained that in 2008 when the stock market was looking like the brink of disaster, she decided she was going to cash out to save what little she had left and was surprised to learn if she did she would have to pay a "surrender" fee - in addition - she would have also owed the IRS, around 20%.

I went on to learn more, asking how she would owe the IRS 20% if her account was down? I was thinking maybe it was down from the highest point, because she would only pay income tax on the gain, if it wasn't inside a qualified retirement plan.  Its pretty funny how most articles/media when I read put so much fear into owning annuites. The reality is annuities are like pensions and obligations are backed by the insurance company, but yet most articles/experts had no clue what they were even talking about.  When came across a well-known attorney who worked for the SEC and teaches about mutual funds and annuities to advisers, he explained most misconceptions or problems with annuities are just the lack of education amongst the adviser and or client, and especially the so-called financial experts in the media, many of which are not even licensed or regulated.  So the easiest thing to do is say how bad annuities, but yet never talk about how bad pensions are (aren't they the same thing? guess big bad annuities sounds far better for ratings/audience purposes.)
 
Anyways, the lady and I spoke more, as she explained that she purchased her annuity from her insurance agent who also offered "financial planning." The agent "recommended" that she take her money out of her 401k and put it in the annuity as it would offer greater protection upon retirement.  Well that made sense, why would you cash in your IRA/401k, of course you are going to pay taxes, no matter what vehicle you are in.

Well, she then explained that taking advantage of the annuity wasn't the mistake per se (although her CPA thought otherwise, most likely he wasn't well versed to understand what an annuity means either) - but it was not knowing that her insurance agent / "financial planner" wasn't a fiduciary.

Fiduciaries adhere to certain professional & ethical standards, simply put they must put your interests first.

Most investors don't know: a fiduciary operates under SEC regulations and must put your financial interests ahead of his/her own. This means a fiduciary cannot give you financial advice or sell you financial products if the advice / products are not in your best interest.

Who is a fiduciary and who is not? CPAs, attorneys and registered investment advisers (RIA) are all fiduciaries.

Certified financial planners, financial planners, insurance agents and stock brokers are not.

An insurance agent or financial planner can sell you a high-load mutual fund or an expensive variable annuity in order to receive a commission. In other words, Are they operating in their best interest, or yours?

An attorney, CPA, or RIA are obligated to adhere to a Fiduciary Standard and work with you to determine whether compensation and fees are in your best financial interest or not.  Let's face it, sometimes you pay for what you get, so don't let fees be the driving force to your decision making process with your adviser.

SEC is working to change this "The recently passed financial reform bill allows the SEC to end this confusion and require all professionals who provide investment advice, whether they are brokers, financial advisers, or investment advisers, to meet the same standard of investor protection. But before the SEC can adopt these new rules, the law requires the agency to conduct [a] study. Those not currently subject to a fiduciary duty have made a concerted effort to submit their comments. Unfortunately, most investors appear to know nothing about this proposed change."

Well needless to say the lady at the party that I was speaking with, learned all this information on her own, and actually said the variable annuity once meeting with a financial adviser who did adhere to a "Fiduciary Standard", eased her mind and actually said the annuity she had was not all that bad.  She explained some of the advantages/benefits it was providing her from a protection standpoint, however, they also reviewed others that could provide her more specific benefits to her goals, needs, and wants.  The adviser she said explained the advantages of staying where she was vs. the small cost "surrender fee" in which she had never paid upfront.  From the sounds of it, I think she just kept it where it was and their plan was to move it in time when things looked brighter in the market, or who knows maybe that plan was not so bad after all.  My guess is, when she decides on her new Financial Advisor abiding by a "Fiduciary", he/she will make sure they avoid any taxation with a simple tax qualified rollover, but I would be curious what vehicle they went with, I wonder if it was a variable annuity...

Ask your financial adviser tough questions:
* Ask your adviser if he/she is legally obligated to act in your best interest and if the answer is "yes," to get it in writing.
** Ask if he / she is earning commissions on any products sold to you and how these commissions are paid. Also ask how commissions affect the price of the financial product being recommended to you.
*** If you don't understand a particular financial product that is being recommended, speak up and question your adviser, it's important that he/she and you, know the fine print and understand that with any financial product there will always be advantages and disadvantages, there is never a one size fits all.

**** MOST IMPORTANTLY, you have the right to fire your adviser, and when working with any professional (accountant, attorney, doctor, contractor) interview a few, and after reading this blog, ask the simple question next time you meet with someone who sells financial products,  "Are you a "Fiduciary"?