It’s generally a given in most industries that movement can produce profit. Whether people, products, or ideas, movement itself creates new venues where money can change hands. This is especially true in the retirement industry. When retirement funds go from “Investment A” to “Investment B”, there is a door standing open with a big sign that says “Free Money”. What are we talking about? Let’s take a look at your neighbor. John next door is an electrical engineer who just retired from IBM. While he worked there, his retirement funds were placed in the company sponsored 401(k). However, now that’s he gone, those funds are looking for a new home. John wants to rollover the funds into a suitably stable investment that will continue to provide income for his retirement years. What should he do? If you’re like most people, you’ll answer that John should go see somebody who knows what they’re talking about. In this case that would be a qualified financial advisor. This advisor will advise (obviously) as to where John should place his funds in order to realize his financial goals. This is, of course, the right answer. Except when it’s not. Like it or not, most of us tend to give credence to those who are experts. You follow your doctor’s orders, you pay your mechanic’s bills, and you take your contractor’s advice seriously. In all of these cases, if an intentional mistake was made by the expert, you have recourse in the legal system. Malpractice claims obviously abound in this country. But what would happen if you didn’t have recourse? What if the law actually gave the right to the provider to give you advice that’s not in your best possible interest? This is the sad reality in the case of financial advisors. Current law recognizes two different standards of financial advice: Fiduciary and Suitable. The Fiduciary standard requires advisors to have their clients’ best interest at heart. The Suitable standard requires much less. As long as an investment is reasonable, it can be a valid Suitable option even if it’s clearly not the best one for the individual investor. Many advisers who deal with retirement products operate under these lesser guidelines. Still, why would an advisor not give you the best possible advice? You’re paying him, and your fee is going to be fairly consistent no matter what advice he gives you. The answer is that it’s true your fee is going to stay the same, but the advisor’s OTHER source of income can vary wildly based on the specific products that he pitches. Many advisors receive commissions for selling certain financial products, and those high commission products aren’t necessarily what’s best for the investor. As the advisor is busy making his profits, it’s coming at the expense of yours. Back to John. He just wants to move his retirement funds to another solid investment. However, unbeknownst to him, the specific investments being offered benefit his financial advisor more so than him. And it’s all legal. His advisor sees the “Free Money” sign and quickly (and legally) swings it to his advantage. In a recent speech at the AARP, President Obama once again made a push for stricter advisor guidelines. More specifically he wants more advisors to be regulated with Fiduciary responsibility instead of the much looser Suitable standard. Obviously this notion has met with blowback from the financial industry. That’s to be expected. After all, there are insane amounts of money to be made with retirement funds, and anything hindering that profit is going to be met with fierce resistance. In the intense politics of Wall Street and Washington, only time will tell where everything will land. In the meanwhile though, there are steps that retirement investors can take which will help right their financial path. If the investor has a proactive kind of attitude, then a self directed IRA would be a great option. Obviously nobody is going to look after your money like you will. However, for the majority of people who prefer to let an advisor take a leading role, it’s imperative to choose the right kind of advisor. Although the terminology can get tricky, what you are ideally looking for is somebody who is paid by your fees alone and doesn’t receive any kind of commission from the products that s/he sells. That way you might not get the most innovative advice, but at least it will be honest.
One Paragon Drive
Montvale, NJ 07645
Phone: (800) 395-5200
Mondays – Thursdays: 8:00 am – 6:00 pm EST
Fridays – 10:00 am – 4:00 pm EST