That's a sobering thought, isn't it? The vast majority of financial advisers you encounter — even the ones you pay fees to — don't owe you, the individual investor, much loyalty at all. As a result, they are free to recommend risky, high-fee investments that might cost you more money and earn themselves higher commissions.
In May, AARP asked 1,425 adults age 25 and over who invest in a workplace retirement plan whether this conflict of interest mattered to them.
The numbers were overwhelming. Nearly 8 in 10 of these consumers said they were at least "somewhat concerned" about this potential conflict. A staggering 93 percent of those surveyed said they think any advice given should be required to be in their best interest.
Yet, as the rules stand today, most advisers are free to put their interests first, without even letting you know they're actually looking out for themselves.
Part of the problem for consumers is that there is no one standard duty of care that applies to all advisers and all clients. It varies. People advising workplace investors — for example, 401(k) and 403(b) investors — may owe one type of duty, while people advising individual investors (IRA and mutual fund investors) owe another duty, depending on their credentials and the kind of investments they sell.
Let me be clear: There are some advisers who owe a clear duty of loyalty to act in their clients' best interest — a "fiduciary duty." They are called "registered investment advisers" (because they are registered with the U.S. Securities and Exchange Commission) and most operate on a fee-for-service basis. In other words, you pay them some percentage of your managed assets and, in return, these advisers are obligated to put your interests ahead of their own.
(Whether he or she is worth that fee is another matter. More on that in a bit.)
Federal regulators, such as the U.S. Department of Labor and the SEC, are trying to clear the muddy waters by imposing the gold standard — the fiduciary duty — on all advisers, with no loopholes.
Naturally, the mutual fund industry — which manages and invests nearly $20 trillion of Americans' retirement assets — is pushing back with some success.
So now what? If the government can't protect you from unscrupulous conflicted advisers, what can you do to protect yourself? Here are a few simple steps to take.
- First, ask your adviser whether he or she is a fiduciary.
- If she is not a fiduciary, ask her about the fees associated with the investment she's recommending, and how those fees compare with other investments. Ask whether she will earn a commission if you choose the investment.
- If she is a fiduciary, you may be paying a management fee in addition to fees charged by the investment funds you select. Over the course of time, those fees will eat up the lion's share of your account balance. Unless your adviser is consistently beating the market by at least as much as you are paying in fees, you are wasting money — lots and lots of it.
- If you don't want to choose between conflicted advisers or high fees, consider investing in index funds through an online brokerage. Index funds automatically invest in broad swaths of the market — for instance, the Dow Jones industrial average. They make money when the market is up and lose money when the market is down. But, because they don't have to pay a superstar fund manager to pick stocks for the fund, their fees tend to be much, much lower than actively managed funds.
That's just my 2 cents worth of advice, but it's free for you.
AARP personal finance expert Jane Bryant Quinn also gives her take on trusting your financial adviser and things you should avoid.
Jean C. Setzfand is vice president of the Financial Security team in the Education and Outreach group at AARP. She leads AARP's educational and outreach efforts aimed at helping Americans achieve financial peace of mind in retirement. She can be reached at firstname.lastname@example.org or on Twitter at @JSetz.
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