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Sather Financial Group

120 E Constitution St
Victoria, TX 77901

(361) 570-1800


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What Is Your Advisor’s Duty?

Recently, hundreds of thousands of investors have been faced with an unexpected, if not awkward, conversation with their financial advisor. If you haven’t had it, be prepared.

It generally starts with the advisor saying they are converting the clients’ IRA or 401k to a new type of account. As the investor becomes inquisitive they want to know the reason for the change.

The advisor typically says the account is converting to a “fee” account versus an account in which the advisor is paid via commissions or other transaction related fees. Often the advisor will also add that this new account requires a “fiduciary” obligation.

This change is required by the Department of Labor and applies to any “qualified” retirement accounts and takes effect in April of 2017.  In preparation, many brokerage firms are discontinuing any retirement accounts that charge commissions. That does not mean there are no fees, just that the fee structure will be different.

There is also some concern that the Trump Administration will kill the DOL’s fiduciary obligation. Regardless of whether they do or not, it is in your best interest to know how to navigate the landscape.

If you are unfamiliar with the fiduciary obligation, it simply means an advisor must put the clients’ best interest first and foremost.

This is frequently met with a confused look from the client. They often reply, “If you haven’t been putting my interests first, whose interests have you been looking after and what are the conflicts of interest?”

It is a great question.

Currently, stockbrokers have a “suitability” obligation to a client. This means they need to identify a general category that would be suitable for a client. However, once the suitable category is identified they can sell the product with high commissions or low commissions. They can sell a product that gives them financial incentives that are never seen by the client. The broker can even receive ski, golf or other trips for selling certain products over others that might be better for the client.

Conversely, a registered investment advisor has a legal obligation to provide services in a fiduciary manner no matter the account type or product.

As is often the case, if you want to identify the conflicts of interest, follow the money. However, following the money is not always easy.

We recommend that any client request, in writing, the number of ways a financial advisor will benefit from selling certain products or managing a relationship. By putting it in writing, it must pass through their compliance department. Generally, the compliance department will not allow them to put something in writing that will come back and bite them later. And if someone will not document the nature of the relationship in writing, then it tells you the relationship is not worth pursuing.

Often the broker will claim the cost is outlined in the prospectus or other lawyer-inspired verbiage. If the financial advisor cannot explain the issues in their own words, then quite possibly they don’t full command of the issues or are uncomfortable identifying the pertinent facts.

Furthermore, we want to know what their capacity is to us. Do they have a fiduciary standard or the lesser suitability standard? In comparing the two, how will this change the advice and recommended products that are placed in client accounts?

Additionally, it is important to recognize that although the new law requires a fiduciary standard on retirement accounts, it does not apply to other accounts. As such, your financial advisor may have two different standards that apply in managing your assets. If this is the case, ask your advisor how the advice and products will differ between the different accounts and assets as well as the cost structure to own them.

Lastly, if a broker functions under a suitability standard it does not mean they are dishonest. Rather, it means there is a potential conflict of interest. The wise investor will take the time to ask intelligent questions, identify the conflicts and mitigate them.

Dave Sather is a Certified Financial Planner and owner of Sather Financial Group. His column, Money Matters, publishes every other week.