Many in the financial industry are opposing the DOL's push to require financial advisers of retirement plans (401K, IRAs) to act as a fiduciary when advising their clients. Recently, the CEO of Raymond James issued a call to arms:
http://wealthmanagement.com/raymond-james-national-conference/opposition-dol-fiduciary-gains-ground
A fiduciary standard would require the adviser to put the clients needs above their own. How is this a bad thing? Why would those who earn commissions or annual fees on investment products oppose this.
The answer is made clear in a prior blog post of mine reproduced below:
How was an adviser, who placed their client in the Highland Small-Cap investment shown above, acting in their clients best interest?
Recently, I have taken on 3 new clients. All 3 were with commission or fee based advisers prior to asking me for advice.
The chart above, produced by Morningstar, is representative of at least 10 of the funds that the new clients owned.
In this case, the client's adviser invested the clients money in the Highland Small Cap Equity fund in 2011. Highland invests in small company growth stocks.
The chart shows the following;
1. Highland's performance over the last 10 years in blue.
2. The performance of all small cap growth funds in orange.
3. The performance of the Vanguard small cap index in yellow.
The Vanguard Index is simply a fund that holds all stocks that meet the definition of small cap growth - this is known as an index fund. The fee for this particular index fund is .08%
The other funds are known as actively managed funds - which means the funds employ managers who pick stocks in an effort to outperform a benchmark (or index). In this case the managers are trying to outperform the small cap growth sector.
A review of the chart shows that the Vanguard index fund clearly was a better choice in 2011 based on a visual look at the performance.
So why would an adviser NOT place their client in the Vanguard?
A look at the the top of the chart shows that there is a 4% load on the fund and an annual expense of 2.75%. This means that for every $1,000 initially invested the adviser gets an initial fee of $40. In addition, the fund takes 2.75% off of the balance every year. In fact, of that 2.75%, 1% goes to the adviser on an annual basis.
The adviser had a choice, he could have recommended the no load, .08% annual fee Vanguard fund, yet they placed their client in the Highland fund which rewarded him a 4% initial fee + 1% of the balance annually.
How was that good for the client. It seems it was good for the adviser.
In my opinion, this is what is wrong with this industry. It is based on a system where brokers and fee based advisers earn income off of recommended investments.
One way to combat this is too work with a fee-only adviser who doesnt accept commissions or fees from products they recommend. Dont confuse fee-only with fee based. fee based can receive fees from products they recommend to you. A fee-only adviser will generally charge an hourly rate or base the fee on the dollar amount of assets managed.
Note: Michael Angelucci MBA, CFP is a fee-only adviser.
