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AdvicePeriod. It's that simple.

Whose Side Is Your Financial Advisor On?

Whose Side Is Your Financial Advisor On?
Imagine you must choose between two restaurants—one with a Department of Health letter grade—“A”—in the window, and the other with no grade in sight. It’s not a hard call: All else being equal, you’ll head to the restaurant whose cleanliness and quality aren’t a matter of mystery.

The world of restaurants is a lot like the financial advice industry. In one category are traditional brokers, many with conflicted, murky compensation practices—like restaurants with no letter grade. In the other category is a smaller but growing group of Registered Investment Advisors (RIAs), including AdvicePeriod, who are legal fiduciaries—the group proudly hanging an “A” in the window. Fiduciaries are bound by law to serve clients’ best interests.

Unfortunately, it is not that easy to tell which financial professionals are on your side—after all, they don’t actually come with letter grades or other clear labels. What’s more, brokers often muddy the water by calling themselves “advisors,” “consultants” or “planners”—anything but “brokers.” Yet brokers and fiduciaries are as different as those two restaurants.

Just like car salesmen and real estate agents, investment brokers earn commissions for each sale they make. And they face constant temptation to steer clients toward the products with the fattest payouts—that’s just human nature. AdvicePeriod’s preference is to charge our clients a fixed fee—freeing us to offer advice that is in our clients’ best interest, with no economic horse in the race.

Brokers are regulated by their own industry, which does limit them to selling “suitable” products. But the suitability standard leaves plenty of room for conflicted behavior, as a 2012 study by the National Bureau of Economic Research made clear.

In the study, hired actors asked brokers to evaluate portfolios that the researchers had created. The brokers routinely recommended changes, even to solid portfolios not in need of change. And they pushed high-cost mutual funds over lower-cost index funds. Do you think a broker’s advice is impacted by how they get paid?

Unfortunately, consumers are frequently not aware of the material differences between brokers and fiduciaries. We often hear, “But surely a broker is required to inform their clients of potential conflicts of interest.” No, they’re not. Brokers are not required to disclose information to their clients which highlights important conflicts of interest and would empower a client to make the best decision.

On the other hand, fiduciaries, such as RIAs, are legally required by federal and state governments to put clients’ interests ahead of their own. Crazy notion, right? They must do what is in their clients’ best interest. As a client, you should not accept anything less.

Fiduciary advisors face far fewer conflicts than brokers because they sell advice, not products, and charge fixed fees rather than sales commissions. Should a conflict of interest arise, fiduciary advisors are required to disclose it promptly and clearly. Not so with brokers.

Lately, the federal government has been championing the fiduciary standard. In early April, the Department of Labor (DOL) attempted to expand the application of the standard. Meanwhile, the Securities and Exchange Commission is seeking to bring brokers under the same strict standards that govern RIAs.

To the surprise of no one, the brokerage industry is fighting these efforts tooth and nail—so the outcome is up in the air. Thanks to the broker’s powerful lobbying efforts, the DOL ruling was a watered down and marginally useful expansion of the standard with the potential to cause more harm to consumers than good. The government’s inability or unwillingness to make the fiduciary standard the only acceptable practice is hard to fathom.

As a result, it’s consumers, along with the professionals who counsel them, who can make the biggest impact. Reserve your patronage for fiduciary advisors who are truly on your side.

Disclosures:
The information provided is for educational purposes only and is not intended to be, and should not be construed as investment, legal or tax advice. The information is subject to change and, although based upon information that AdvicePeriod considers reliable, is not guaranteed as to its accuracy or completeness. AdvicePeriod makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information.
In accordance with Treasury Regulations Circular 230, any tax discussions contained in this communication was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter addressed herein.
Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this article will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. In preparing this article, we have relied upon information provided by third parties. While we believe these sources to be reliable, the accuracy and completeness of the information is not guaranteed. We have provided performance results of certain indices for comparison purposes only. A description of each index is available from us upon request. The historical performance results of each index do not reflect the deduction of transaction and custodial charges, nor the deduction of an investment management fee, the incurrence of which would have the effect of decreasing indicated historical performance results. It should not be assumed that your account performance or the volatility of any securities held in your account will correspond directly to any comparative benchmark index.
AdvicePeriod, LLC (“AdvicePeriod”) is an SEC registered investment adviser with its principal place of business in the State of California. Any reference to the terms “registered investment adviser” or “registered,” do not imply that AdvicePeriod or any person associated with AdvicePeriod has achieved a certain level of skill or training. AdvicePeriod and its representatives are in compliance with the current registration and notice filing requirements imposed upon registered investment advisers by those states in which AdvicePeriod maintains clients. AdvicePeriod may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from registration/notice filing requirements. This article is limited to the dissemination of general information pertaining to its investment advisory services. Any subsequent, direct communication by AdvicePeriod with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of AdvicePeriod, please contact AdvicePeriod or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov).
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