What Do We Do?

Some of us here were involved in an interesting presentation last week on left versus right-brained thinking. We learned that, as advisors, we tend to spend quite a bit of time on the left side of the brain, which is driven by logic, numbers and data. The right side of the brain, on the other hand, is the emotional side, where pictures get painted, goals are envisioned and, most importantly, where decisions get made. This got us thinking about how we define what we do and, more importantly, how we communicate this to our clients and those trusted advisors with whom we work.

Our ultimate goal as fiduciary advisors is to provide for our clients’ financial and emotional security through comprehensive financial planning and investment management. That statement means a lot to us and, in theory, does an excellent job of summing up what we do. That said, it is a fairly left-brained concept that does not always translate well. While it makes sense that most of our time with clients is spent on the left side of the brain, using data and other logic to set a path with our clients towards their goals, it is the right side of the brain where our clients imagine those goals.

So, with our admittedly left-brain leaning ways, can we paint a better picture of what we do?

What we do is aim to understand our clients’ life goals and help them build a plan. This plan provides a clear path to achieving those goals, leaving our clients free to live their lives as envisioned, knowing the financial components of those life goals are in the hands of someone they trust and know to always act in their best interests.

We will continue to be analytical and fairly left-brained when it comes to what we do, but will strive to communicate with the right brain in mind as well. We will continue to make recommendations on investments, insurance, retirement and estate planning, but do understand that these are merely tools our clients use to help their families, protect their lifestyles, achieve comfort in retirement and build some kind of legacy for the future.

We encourage our clients and trusted advisors who read this blog to help us in furthering this definition. What do you value in what we do? How do you perceive our role as it pertains to you or your clients’ goals? What do you expect from an advisor in general? Use the comment button below to start the conversation and thanks, as always, for taking the time to read the blog.

Chip Workman, CFP®
cworkman@taaginc.com
www.taaginc.com

Hire an Advisor, Not a Salesperson

A common misconception about the investment world is that the person giving you financial advice is either commission-based or fee-based. At The Asset Advisory Group we are neither. We are fee-only. This means that we do not receive any compensation from the investment companies whose products we use to implement our client’s financial plans.

A commission-based salesperson will always have a temptation to make a recommendation based on what would be best for themselves or the company they represent, not their client. I’m not saying this is intentional, but I have seen it happen time and again.

If a client comes to me with $500,000 to invest, I will charge them a 1% annual management fee and allocate their funds to low cost institutional no load mutual funds. I receive no compensation from the mutual fund company. If the same client were to walk into a broker’s office, they may end up with a $500,000 annuity which pays the broker a $24,000 commission. When looking at an immediate payout of $4,000 or $24,000*, which would most salespeople choose? And do you think they will continue to give on-going advice to this client or look for their next prospect?

There are many advisors that are fee-based which accept both an ongoing management fee from their clients as well as a commission from the company whose products they are selling. Sounds like a great plan – for the advisor!

While I feel very strongly that fee-only advisors have the best opportunity to serve the interests of their clients, the bottom line is to know how your advisor is compensated. Anyone who gives you financial advice should not have a problem revealing exactly how much money he will make based on his recommendations for your portfolio.

*assumes a 6% commission and an 80% payout on the annuity and an 80% payout on the management fee

Chris Carleton, CFP®
clcarleton@taaginc.com
http://www.taaginc.com

Rationalization

“It depends on what the meaning of the word ‘is’ is.”
Bill Clinton, August 17, 1998 grand jury testimony.

The SEC charged Goldman Sachs & Co. with fraud on April 16th. It gets a little complicated (as these stories usually do these days) but basically Goldman was hired by a hedge fund, Paulson & Co., to create a collateralized debt obligation (CDO) pool so Paulson could “short” or bet against it. Goldman then took the investment and sold it to its retail clients, knowing the hedge fund’s plan and the likelihood that the CDO would drop in value. The SEC contends that Goldman should have disclosed the conflict. Goldman, and many others writing commentary about the case, say that this is the way the market works – Goldman technically did nothing illegal.

This case is a great illustration of what is wrong with Wall Street.

If we expect every transaction we enter into with a Goldman Sachs, Merrill Lynch, Morgan Stanley, and all the other firms to be a cat and mouse game of ‘What are you NOT telling me?’ then how can investors ever be sure that they are going into a transaction with all the facts on the table? If every interaction with your financial advisor was subject to the measurement of whether what they were doing was “technically” illegal or not, how comfortable would you feel?

Many years ago investment banking and brokerage firms were partnerships, and the managers invested their own money along with their clients. As publically traded corporations, they became larger and larger, and lost sight of their original objectives: serve the client first and foremost. Now their financial incentives are structured to encourage short-term profits for incentive bonus plans and risk taking to increase the possibility of big rewards. If they’re right, they win. If they’re wrong, we lose.

As legislative debate drags on in Congress over Senator Dodd’s financial reform bill, we may have missed the best opportunity to cut through the legal rationalizations and protect the consumer. The original bill required a fiduciary standard of care for ALL financial advisors. That would mean that EVERYONE would have to act in the best interest of his or her clients at all times. Instead, the revised bill requires the SEC to conduct another study on the various effects of extending the fiduciary standard to brokers.

It’s amazing what some people can rationalize away sometimes.

Jeannette A. Jones, CPA, CFP ®
jjones@taaginc.com
http://www.taaginc.com/

The Fiduciary Standard – A Call for Clarity

If you read nothing else in this week’s blog, promise me you and every one you discuss this with will, when it’s time to seek financial planning and investment advice, make sure the person you choose to work with is held to a fiduciary standard. If you’re busy this week and need to move on, you’re free to go.

With all the talk about health-care reform, March Madness, Tiger and the other stories of the day, an issue quietly gliding under the radar is the pending financial services reform making its way through Congress.

I won’t lull you to sleep with all the ins and outs of what’s being discussed or the less than savory politics and lobbying going on behind the scenes. Instead, I want to focus on one issue.

One of the biggest challenges facing legislators is a concept known as the fiduciary standard. This standard simply states that anyone who holds themselves out as a financial advisor be required to act in their clients’ best interests.

Got it?

You pay an advisor to manage your assets and help you plan for your financial future and the advice they offer is in your best interest; not because they get a bigger commission, not because they go on a fancy trip, but because they think it will help provide you a successful investment experience. Seems like a no-brainer, right?

Unfortunately, across the industry, especially the brokerage and insurance firms, millions of lobbying dollars are being spent to make sure this standard doesn’t expand industry-wide. I’ll forego bashing those who are fighting this and let you draw your own conclusions. You can read more about those arguments in an article by Tara Siegel Bernard of the New York Times. My goal is to set the record straight on why this doesn’t need to be the confusing issue that it has become in the face of so many salespeople posing as advisors.

The bottom line is, if you’re looking for someone to pick a few hot stocks for you from time to time, feel free to seek out a non-fiduciary salesperson. Also understand that you’re participating in speculation, not investing. There’s nothing wrong with this. It is similar to buying a racing form or paying a handicapper to get a tip on a horse. You pay for this advice race after race after race and sometimes you win, but does your win cover the costs of what you spent on the advice?

On the other hand, if you’re discussing how to meet your long term investment goals, ensuring that your money outlives you and not the other way around, you should make absolutely certain that the advisor you choose is required, at all times, to put your interests before their own.

If you or anyone you know is shopping for this type of advice, it should be as easy as asking if the person you are talking to is a salesperson or a fiduciary advisor. Just ask. If you receive any answer other than, “Yes, I am held to a fiduciary standard, I have no conflicts of interest in the way in which I will help you and I receive compensation solely from the management fees my clients pay me,” keep looking.

Chip Workman, CFP®
cworkman@taaginc.com
www.taaginc.com

The F-Word

One of the least discussed but most important factors to consider when hiring a financial advisor is whether or not they are a fiduciary. This means the advisor has a legal obligation to put their clients’ interests ahead of their own. Most consumers assume that their advisor is acting in this capacity, when many times he is not.

The law regards the job of advisor as a position of trust and requires those with a fiduciary obligation to disclose any conflicts of interest and to act with a heightened sense of duty toward clients. Registered Investment Advisors with the Securities and Exchange Commission are held to this standard. As of July 1, 2008, Certified Financial Planners had the ethical standards by which they are held revised, making it explicit they too must put clients’ interests first, act as fiduciary and disclose the scope of their engagement and their compensation when engaging in planning activities.

Because a broker’s job is considered to be transactional as they are often placing trades on a client’s behalf, they are held to a different regulatory standard. Their duty is to make a recommendation that is “suitable” to their client’s circumstances. If a brokerage house manages a large cap growth mutual fund that has an internal expense ratio of 1.50% and an additional 12b-1 marketing fee of 1% that is paid to the broker, this would be considered suitable instead of recommending another large cap growth fund with much lower internal costs.

In the financial services industry, there has been a lot of talk about how consumers are confused about the difference between brokers who call themselves "financial advisors" or "investment advisors" and Registered Investment Advisors who are held to a fiduciary standard. In the past each were paid very differently – advisors charged management fees and brokers received commissions. Over the past several years many brokers have begun charging fees, giving consumers the impression that they are acting as fiduciaries.

The recently proposed financial regulatory reform legislation gives members of Congress the opportunity to improve the world of consumer finance. Fortunately Mary Shapiro, head of the Securities and Exchange Commission, has stated that the SEC might recommend creating a single standard that applies to advisors and brokers – a fiduciary standard.

In the interim, make sure you question your financial advisor as to which standard they are held.

By Chris Carleton, CFP®