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Who's looking out for me?
Sunday, February 27, 2011
Bradley R. Newman

Of all the questions you have regarding the investment management of your portfolio and your financial planning concerns, isn’t this the real question – ”Who is looking out me?” This may be a gross oversimplification of your lingering concerns regarding investment suitability, investment fees and the basis of advice you receive; however, if you were able to work with a professional who put your needs ahead of theirs, wouldn’t everything else take care of itself?

We’re From The Government. We’re Here To Help

The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in July of 2010 with the express intent of protecting the retail investor and consumer from large financial institutions and Wall Street. As part of the Act, the SEC was given the authority to hold brokers to a fiduciary standard – the highest level of consumer protection available.

While the SEC should want all advisors held to a fiduciary standard, only three of the five SEC commissioners have expressed support for the change. The reality is that a fiduciary standard will cut into Wall Street’s profits and their considerable lobbying power remains dedicated to preventing the fiduciary standard from being applied to its brokers.

What’s A Fiduciary?

Advisors who serve in a fiduciary capacity are legally required to act solely in the best interests of their clients – they must put their client’s needs ahead of their own and provide advice from a basis of complete objectivity.

Currently the financial planning/investment industry regulation is bifurcated into 1) the Registered Investment Advisory community who is held to a fiduciary standard and 2) the brokerage community who is only required to meet basic suitability standards; they are not allowed to harm clients, but their interests can legally be placed ahead of their clients’.

The fiduciary standard requires the advisor to make the absolute best recommendation for your situation regardless of the impact on their compensation; whereas, the suitability standard allows the advisor to factor their compensation into the decision, as long as the ultimate recommendation does not harm you.

How Do You Get Objectivity?

The answer is quite simple, you pay for it. The easiest way to ensure objectivity is to enter into relationships where the advisor’s compensation is clearly spelled out and is not tied to commissions that will vary from product-to-product or from service-to-service.

The most straightforward compensation models involve flat fees for services provided; a set percentage to manage an investment portfolio or a flat fee to complete a financial planning analysis are the two most common methods regularly utilized by advisors that operate in a fiduciary capacity.

Do Your Homework

The information that you need to determine how advisors are compensated is readily accessible. For example, the detail about compensation for Registered Investment Advisors is contained in the annual disclosure (Form ADV) that they are required to file with the SEC. These disclosures can be obtained from the U.S. SEC website ( for firms that manage in excess of 25 million dollars and from the PA SEC website ( for firms that manage less than 25 million dollars (this threshold is scheduled to increase to 100 million dollars later this year).

Don’t be misled by designations or titles that advisors utilize to determine how they will work with you. It is commonplace for two advisors with the same title or designation to operate in distinctly different ways with clients; for example, some CERTIFIED FINANCIAL PLANNER ™ practitioners will operate on a completely fee-only basis, some will sell products for commissions and some will use a combination of both the for-fee and the for-commission approaches.

Be Your Own Advocate

If you want to work with professionals that will put your needs first, it will ultimately be up to you to determine who those professionals are. In addition to utilizing the public information that will explain their compensation, you will need to conduct in-depth interviews where you ask the difficult questions about how investment decisions are made and where their allegiance lies.

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