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Your financial advisor may NOT
be required to act in your best interest and you may be
receiving dangerous advice that could cost you a fortune.
Read on and I will reveal how you can recognize the warning
signs—it’s one of the industry’s best kept secrets.
Most people using a financial advisor have similar
expectations. They expect the advisor to recommend
appropriate investments, monitor them and make any necessary
adjustments to improve the portfolio’s performance.
Underlying these expectations is the understanding,
regardless of whether the advisor is an insurance agent, a
stockbroker or a registered investment advisor, that they
will act in the your best interest.
The legal term for acting in your best interest is called
fiduciary responsibility. For instance, if you set up a
trust for your child and name a trustee to oversee that
trust, the trustee has a fiduciary responsibility to act in
your child’s best interest. If they don’t, they can be taken
to court and be held liable for their actions.
A common misconception among investors is that their
insurance agent and/or stockbroker have this fiduciary
responsibility. They don’t. That’s why following their
advice can be dangerous.
Remember those papers filled with fine print they have you
sign when you open an account? If the investment goes sour,
the agent or stockbroker is legally protected in all but the
most egregious cases.
Consider the implications. If you have an investment that
tanks and the stockbroker doesn’t take action to prevent it,
it’s your fault, not the stockbroker’s! If you tie up all
your money for 15 years and are forced to pay outrageous
penalties to tap it early, it’s your fault, not theirs!
If an advisor is not legally required to act in your best
interest, what incentive do they have to do so? Moreover,
most insurance agents and stockbrokers are paid by
commissions on the products they sell. What’s to keep them
from recommending the product with the highest commission
when there is a better product with lower commission?
Nothing!
That’s why I am so concerned about ‘hot’ products like
Equity Indexed Annuities. They pay a higher commission than
almost every alternative. And they are being sold by someone
who does NOT have the legal responsibility to act in your
best interest! It’s that way with many other investments, as
well.
Of the three common types of financial advisors, only the
Registered Investment Advisor has the fiduciary
responsibility to act in the client’s best interest. As a
result, they are held to a much higher legal standard then
stockbrokers and insurance agents.
A recent survey by Zero Alpha Group shows that 91% of those
surveyed felt that stockbrokers and Registered Investment
Advisors should be held to the same accountability
standards. Congress is even attempting to make it that way,
but those efforts are being strongly contested by major
banks and brokerage firms.
A Registered Investment Advisor can not earn a commission on
an investment (but they can earn a commission on insurance
products if properly licensed). That’s why Registered
Investment Advisors either get paid for managing a portfolio
through a small ongoing fee based on the value of the
account, or an hourly fee.
Just because an advisor gets paid on a fee basis doesn’t
mean they bear a fiduciary responsibility. Over the last few
years, banks and brokerage firms have focused on
transitioning their clients from commission-based accounts
to fee-based accounts. Even so, they still do not bear the
legal responsibility to act in your best interest.
(Just because someone is a Registered Investment Advisor
doesn’t mean they’re right for you. Training, experience and
investment philosophy also play a major role.)
How can you know? It’s simple. If the advisor is selling you
an insurance product such as an annuity, they don’t have to
act in your best interest. If your advisor works for any of
the major banks or brokerage firms they don’t have to act in
your best interest. Even if your advisor is ‘independent’ or
out on their own, if they get paid by commission they are
not required to act in your best interest.
Heed the warning. Question recommendations. And contact me
for a clear, unbiased second opinion, free of charge. It
could save your fortune.
Mr. Voudrie is a Certified Financial Planner, nationally
syndicated columnist and the President of Legacy Planning
Group, Inc., a Private Wealth Management firm in Johnson
City, TN. For more information call 1-877-827-1463 or email
jeff@guardingyourwealth.com.
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