How Your Broker Gets Paid May Impact The Plans They Sell You!

Whether you’re investing in stocks and bonds, mutual funds or planning for retirement, it’s always a good idea to enlist the help of a financial advisor.

There is no question that advance planning for anything, in general, can be daunting.

And when it comes to planning how you will live the rest of your life after you stop working that’s no easy feat either. Enlisting the help of a financial professional should make it easier. But just as no financial plan is created equal, neither are financial advisors, brokers and planners.

When it comes to investing your money you want the most bang for your buck. Jeff Bucher, an Investment Advisor says there are two types of advisors – those who operate under the Fiduciary Standard and those who do business under the Suitability Rule. Being able to distinguish between the two is paramount to meet your investment needs and retirement goals.

The Fiduciary Standard

Fiduciary he says is a legal obligation where the advisor must put your interest as a client ahead of their own, and it is the highest standard of care available under law.  Fiduciary advisors can be regulated by the Securities and Exchange Commission (SEC) as well as state regulators.

Bucher explains:

“An example to explain this standard is an advisor with two identical products that have different fees, who must recommend the one that is lower in cost.  They can’t recommend the product that makes more money for them or their company.

This distinction is very important as, according to Bucher, fiduciary advisors are often paid a quarterly fee that is calculated as a percentage of assets.

But do Fiduciary Advisors always act in the client’s best interest – no! In fact, last month Consolidated Credit reported  on brokers selling to Americans planning for the last years of their life deceptive retirement plans that benefit them more than it does the customer.  The U.S. Department of Labor (DOL) is intent on updating the requirements for these brokers and has garnered the support of President Barack Obama and the AARP.

Suitability Rule

Then there’s the suitability standard which differs from the fiduciary – they’re not mandated and they get paid by commissions.

Under Financial Industry Regulatory Authority (FIRNA), Bucher says it is required that a registered representative or insurance professional have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer.

“This is based primarily on financial objectives, current income level and age, in order to complete a commissionable sale of a financial product,” Bucher says. “There is no requirement to find the best investment for you, only ones that are seemingly suitable for you.  They offer a range of products for sale carried by the company he or she represents. The way that someone with a suitability standard gets paid is by commissions calculated as a percentage of money invested into the product.”

To make sure you’re getting the longer end of the stick remember to ask the questions below, as outlined by the Save Our Retirement. The answers will help you ascertain whether a provider is likely to provide you with the advice or plans more beneficial to you or them.

As my broker, are you legally obligated to act as a “fiduciary?”

How are you compensated? Is it through hourly or account-based fees, or, is it based on commissions for each product they sell you?

What exactly are you offering to do?

As you prepare to map out the plan for living your retirement years, Bucher says this is what you should expect from a retirement planner and these are important questions your planner needs to ask:

  • How are we going to create an income/distribution plan of these assets that’s going to be reliable and sustainable for as long as you live?
  • How do we select a social security filing strategy that will best meet our needs it?
  • How are we going to protect your standard of living from inflation?
  • How are we going to reduce your tax obligations?
  • How are we going to position these assets in a way that you still have the liquidity that you need for all kinds of emergencies and related discretionary spending?
  • How can we position things in such a way that you have the income stream you need and, at the same time, have the flexibility to handle life’s unknowns?
  • How can we help protect you from the risks of a long term illness?
  • How do we select the right health care plan to best meet your needs and resources?
  • How do we protect the legacy that you want to leave behind for your heirs?

To better understand the differences between the two planners, do your due diligence so you can choose the one that better suits your needs.