Market Advisory Group: Three Reasons Why You May Want to Fire Your Broker

Market Advisory Group founding partner ​​​Larry Kloefkorn gives his take on why you may want to fire your broker

If you have your ear to the ground, you’ve no doubt heard all the politics surrounding the fiduciary rule. This rule would require that all financial professionals working with retirement investments act in their clients’ best interest, even when it conflicts with their own. The Department of Labor (DOL) found these conflicts of interest to be responsible for some $17 billion a year in excessive fees, yet the rule is currently under an 18-month extension period for reassessment. Some experts suggest that the rule may be permanently dismantled and never fully go into effect.

Regardless of what happens, investors should be aware that there is a difference between the fiduciary rule and the fiduciary duty. Being a licensed advisor subjects an investment advisor and investment advisory firms such as Market Advisory Group to a fiduciary duty. That means we are held to higher standards of good faith, trust and confidence regardless of whether or not the rule goes into effect.

It was Arthur Levitt, former SEC chairman, who said, “If you have more than $50,000 to invest, you should fire your broker and find an investment advisor.”[1] Working with a fiduciary may not only save you money, it can result in a stronger, more secure retirement. Here’s why:

REASON #1: The Gray Area in Suitability Standards

Broker-dealers, also known as registered representatives, are held to the suitability standard of liability, enforced by the Financial Industry Regulatory Authority (FINRA). This standard requires that professionals take reasonable steps to make sure the investments they recommend are suitable for their client. Problems often arise for the consumer, however, because the terms “reasonable” and “suitable” invite a lot of gray areas. To understand why, let's use a shopping metaphor.

Consider the salesman who operates under suitability standards to sell clothing online. A client planning a trip to Iceland calls him up and says, "I need a coat." The salesperson asks her a few questions about her size and favorite color, and then says, "I have the perfect coat in your favorite color, and I can get you a deal if you act now." "Yes," she says, "order the coat." That's what the salesperson does; he also receives his commission. Five days later, the Fed Ex truck pulls up and delivers the client a shiny red raincoat. It’s not at all the kind of coat she needs for her trip to Iceland, but because the salesman took reasonable steps and she gave him the go-ahead, the standards were met.

REASON #2: Lack of Access

Obviously, it’s easy for a consumer to see when they’re not getting what they need when shopping for clothes. With investments, it’s trickier and problems often don’t show up until years later. It’s also not always the salesperson’s fault that the client doesn’t get what they need. It’s simply a case of what’s in stock. It might be that the salesperson only has access to raincoats because their company doesn’t deal in parkas. If you need an income-producing investment, for example, then your broker-dealer may only be able to sell you the kind of income-producing vehicles offered by his or her company. This is likely how so many investors end up in variable annuities, which are notoriously complicated and expensive to own.

Independent firms are able to shop around among thousands of different products and investment vehicles sold by thousands of different companies. This allows them to compare the fee structure, company performance and other costs. Why? Because as fiduciaries, we don’t work for a company or entity; we work for you, the investor.

REASON #3: Incentive

Just as there is a difference between the fiduciary rule and the fiduciary duty, there is also a difference between fee-only and fee-based professionals. Once again, it is you, the investor, who stands to lose if you don’t understand what this difference can mean. Fee-only advisors are fiduciary professionals legally obligated to act in your best interest when making investment recommendations, and they cannot accept commissions. Their only source of revenue is the fee they charge for advice and investment management, which means if your account earns less money, they earn less money.

On the other hand, the typical broker is commission-oriented. They often receive this commission even before your account earns anything, and you continue to pay out these management fees in good times and bad. Even if they do have Dual Registration and recommend a “fee-based” account, thus acting as your investment advisor, they can at the same time sell you other investments that earn them a commission. When that happens, the lower of the two legal standards typically applies to that transaction, meaning they are acting as a broker adhering to suitability standards. 

Ask yourself this: if you had to choose between buying either a new Cadillac or a used Cadillac, for the exact same price and with the same benefits and perks, which would you rather have? If you think you deserve the best, then you might want to ask your financial professional whether or not they are acting as your fiduciary.

Market Advisory Group is committed to helping anyone who needs financial advice. Whether you drive a Cadillac or an old jalopy, if you’re concerned about whether or not your accounts are being managed with your best interest in mind, give us a call or fill out this simple form. We look forward to hearing from you.

Investment advisory services are offered through Foundations Investment Advisors LLC, an SEC-registered investment advisor.

[1] Levitt, Arthur. “Three: Analyze This.” Take on the Street. Vintage, 2002. Print.

Source: Market Advisory Group