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Tag: Fiduciary

CERTIFIED FINANCIAL PLANNER™ vs Financial Advisor: What’s the Difference?

Written by support@seostats.com on . Posted in Financial Planning, Resources.

Recently, a client told me about a conversation they’d had with a friend. The client’s friend claimed they did not work with a financial advisor because advisors charge high commissions.

This is a misconception that many, many people hold as the truth – and most professionals in the financial industry do very little to clear up the confusion.

When it comes to a CERTIFIED FINANCIAL PLANNER™ vs financial advisor or other industry professional, there are differences you need to understand.

Of course, my client knew how far from the truth their friend was. At Lake Road Advisors, it’s not that we don’t charge high commissions. We don’t charge commissions at all!

But aren’t we financial advisors? We are – and all advisors are not running the same type of business. Here’s what you need to understand when considering hiring a financial professional, including the differences you’ll find between a CERTIFIED FINANCIAL PLANNER™ vs financial advisor.

 

The Lack of Transparency Leads to Confusion Around Who Gives Financial Advice

This misunderstanding about how businesses charge to deliver financial advice to their clients is part of why many people simply don’t trust the financial industry as a whole. In fact, Financial Advisor Magazine reports that only 23% of investors trust financial advisors.

I get it. I personally know many people who have had bad experiences with pushy salespeople who call themselves financial advisors and sold products for high commissions.

This bothers me as someone with the job title “financial advisor.” The reality is, that’s all the term is: a job title. It does not confer any kind of expertise, knowledge, professionalism, or ethical standard.

Because anyone can use the term, I often refer to myself as a CERTIFIED FINANCIAL PLANNER™ vs financial advisor, because I don’t want to be lumped into that broad category that includes businesses that look nothing like the financial planning practice we run at Lake Road.

The problem starts with transparency. It’s very difficult for you as a client to know precisely who you’re dealing with when someone shows up calling themselves a financial advisor.

 

CERTIFIED FINANCIAL PLANNER™ vs Financial Advisor: There’s a Difference!

“Financial advisor” is a broad, unregulated term. Again, anyone can call themselves a financial advisor, regardless of background, education, or training.

Someone who is an insurance agent, a stock broker, an investment advisor, or a financial planner can all call themselves a financial advisor — even though, clearly, these professionals all do very different things for the people they work with.

Making the problem even worse is the multitude of titles and designations that financial advisors have. Many of these titles are little more than marketing strategies; they don’t actually indicate relevant training or experience.

You can dive into some of the specific designations that do hold weight here. Generally speaking, you want to look for someone who holds the CFP® credentials.

A CFP® is a CERTIFIED FINANCIAL PLANNER™ accredited and regulated by the CFP® Board.  To use these marks, a CERTIFIED FINANCIAL PLANNER™ must undergo rigorous education, training, and experience standards. They must also sit for and pass an intensive board exam and maintain continuing education credits over time.

Perhaps just as important, if not more so, is the fact that a CERTIFIED FINANCIAL PLANNER™ also needs to commit to a code of ethics. As a CFP®, I am legally and ethically bound to act in the best interest of my clients at all times. Our firm upholds the fiduciary standard — no matter what.

You’d think this would be a given for any financial professional, but that’s where the high-charging advisors come into play. Not all financial professionals are required to act in their client’s best interests. Some only need to do what’s “suitable,” meaning it can work for you but it’s not necessarily the best option or solution.

 

When Working with a CERTIFIED FINANCIAL PLANNER™, You Know What You’re Getting

Remember, anyone — regardless of what they actually do for you — can call themselves a financial advisor. But only certified and credentialed professionals can use the CFP® marks, which is why this is a great designation to look for if what you need is comprehensive financial planning and investment management advice.

If you want to go a step further, look for a CFP® who works within a fee-only firm. When a planner or advisor is “fee-only,” it means they only accept payment for services directly from their clients; they don’t receive commissions or payments from third parties. The only thing they sell is their service, which again, is comprehensive advice (not products).

Working with a CERTIFIED FINANCIAL PLANNER™ vs financial advisor can bring more transparency to the process. You know what you’re getting.

To me, the real value in what we do lies in the relationships we build with clients and the financial planning — not the investment management. We take our time to understand your goals and what’s important to you, and we don’t prescribe before we diagnose.

You may not get that with a salesperson whose top priority is to sell you a product. If you want a financial plan, make sure you go to a financial planner who delivers that advice, rather than recommends products (or specific investments before understanding what you’re trying to achieve!).

Ultimately, I do agree with that friend of my client’s who disliked high-commission advisors. If you are paying over 1% for a financial advisor who talks to you once a year and only about your investment portfolio, then yes, you are overpaying.

But don’t shun all means of receiving financial advice. Instead of not working with anyone, consider working with an actual CERTIFIED FINANCIAL PLANNER™ who serves as your fiduciary to build a plan for not just your investments, but your entire life.

Want to see a quick video on How to Find the Right Planner For You? Click below and watch Episode 3 of “The Build”, our 24 part video planning series that takes you from start to finish in building a financial plan with Lake Road Advisors!

Is a Credit Union Right for You?

Written by support@seostats.com on . Posted in Cash Flow, Financial Planning, Saving.

In an effort to continue to bring you valuable insights, this month’s guest post is from Ted Goldwyn, who is a great resource for questions related to banking, credit unions and financial services.

Ted Goldwyn is the founder of Ted Goldwyn Writing, a marketing and communications firm based in Corning, New York that specializes in thought leadership and content marketing for the financial services industry. Ted has been published in numerous industry journals including Credit Union Magazine and CreditUnions.com. Prior to starting his writing career, Ted spent nearly two decades in various financial services executive roles including Director of Business Services at Corning Credit Union, and Vice President, Product Manager for Small Business Services at The Bank of New York. Ted holds a B.S. from Cornell University, and an M.B.A. in Finance and International Business from New York University’s Stern School of Business. Ted may be contacted at ted@tedgoldwyn.com and at www.tedgoldwyn.com.

Despite boasting over 100 million members in the U.S., credit unions are often neglected in today’s crowded financial services market. Many consumers don’t consider joining a credit union when it comes time to open a new checking account or apply for a loan. Others assume they don’t qualify for membership or are wary of a credit union’s perceived limitations.

It’s a good time to take another look at credit unions. They are evolving in many ways and may be a great fit for your financial needs.

 

A history of serving the underserved

Credit unions were created over 100 years ago to provide underserved populations with basic financial services like savings accounts and personal loans. These populations included manufacturing workers and other close-knit employee groups, many of which pooled their modest savings to start their own member-owned cooperatives.

Today, credit unions are both growing in asset size and falling in number. According to the latest data from the National Credit Union Administration (NCUA), there are 5,335 federally-insured credit unions in the country, a sharp decline from the industry’s 1969 peak of 23,866. At the same time, today’s average credit union holds $283 million in assets, and a record 315 institutions are considered “large,” with over $1 billion in assets each.

As the industry has changed, credit unions have expanded their membership eligibility, providing consumers with new opportunities to join. In addition, it is more likely that your hometown credit union now offers many of the same convenient services as community and regional banks.

 

How are credit unions different?

As non-profit, member-owned cooperatives, credit unions are generally not subject to corporate income tax. This allows them to pass savings on to their member-owners in the form of higher deposit interest rates (called share dividends in credit union parlance), lower loan rates, and lower fees.

Despite their growth in recent decades, credit unions still tend to be smaller than banks. For example, the largest credit union in the country, Navy Fed, currently holds $103 billion in assets. That is pretty big! But you can fit 26 Navy Feds inside one JPMorgan Chase, which has assets of $2.7 trillion. In fact, each of the top four U.S. banks is larger in asset size than the entire credit union industry!

Because of credit unions’ membership structure, each accountholder has voting rights, allowing them to participate in the annual election of an all-volunteer board that represents the members’ interests.

Membership is restricted to individuals that share a “common bond.” These can be employees of one or more organizations, members of a non-profit organization, immediate family of current members, members of a religious or educational organization, or individuals who live, work, do business in or attend school within a defined geographic area.

In contrast with credit unions, most banks are for-profit, shareholder-owned corporations. They are subject to income tax, and are larger than credit unions, with average assets of $3.4 billion. Most importantly, management’s incentives are aligned closely with the interests of the bank’s shareholders, rather than their customers.

 

Credit unions offer significant benefits

So, why should you consider moving your relationship from a bank to a credit union? Here are a few reasons:

·        Better rates and fees: For one, credit unions’ tax-exempt structure and emphasis on returning value to their member-owners means they generally offer higher deposit rates. For example, according to a quarterly analysis provided by the NCUA and S&P Global Market Intelligence, as of June 28, 2019 credit unions averaged 5-year CD rates of 2.38%, vs. just 1.87% for banks. Similarly, the credit union average money market rate was 0.37% vs. 0.26% for banks.

On the loan side, the average rate for credit union 5-year home equity loans was 4.88%, as compared with banks’ 5.39%, and the average 60-month new auto loan rate was 3.69% vs. 5.22% — a whopping 153 basis points less!

In addition, fees for common banking services like checking overdrafts, Fed wires, and ATM withdrawals are generally lower at credit unions.

·        A focus on the member: Cooperatives have also long held a reputation for better customer service, and at many credit unions this still rings true. However, a 2018 ACSI benchmark study showed customer satisfaction ratings have slipped at credit unions in recent years, as banks’ have risen, and they are now on par.

·        Community connections: Due to their strong community connections and bettering their members’ financial lives, the credit union movement has taken the lead in consumer financial education.  Many individual credit unions around the country offer customized financial education programs in partnership with local schools and social service agencies. The NCUA also maintains an informative financial education and awareness site at www.mycreditunion.gov.

Despite these advantages, a credit union may not be the best choice for your particular needs.

Because of their smaller size, the typical credit union has fewer physical branches and ATMS, potentially restricting access to your money. However, some credit unions now offer innovative checking accounts that reimburse monthly bank ATM service fees if certain minimum criteria are met. This allows you to use any ATM across the country as your personal branch!

Traditionally, credit unions have offered fewer products and services, and were less technologically advanced. This has changed in recent years, as digital banking access is now considered table stakes. Before you decide to join a credit union, familiarize yourself with its services to ensure it offers everything you need.

Lastly, member eligibility remains a barrier to entry for some. For decades, opening a credit union account was like joining an exclusive club. Today, it’s far easier to join a cooperative, due to the growth in community charters allowing access to anyone who lives, works, attends school, or belongs to a religious organization within a defined geographic area.

Credit unions are an often-overlooked alternative to the big national banks. They offer better rates and fees, provide great service, and care about their members and the communities they serve. It’s worth taking a fresh look at the cooperative option.

Do I Need Life Insurance? What to Think About Before You Decide

Written by support@seostats.com on . Posted in Insurance.

If you’re in your 30s, you’ve likely had someone — a friend, a person you met at a networking event, someone who cold called you out of the blue — try to sell you on life insurance.

They may use scare tactics to try and convince you to buy a policy, or they might have some arguments that make having life insurance seem like a responsible financial thing to do (which it may be!).

But how much insurance do you really need? And what if you don’t need it at all?

Let’s take a quick look to better understand life insurance, the real purpose of it, and whether or not you actually need it.

 

The Purpose of a Life Insurance Policy

Life insurance offers financial protection against you passing away early. If you were to die tomorrow, think about who would be financially impacted: your spouse, your children, and potentially other family members who may depend on some or all of your income.

Just like car insurance protects you against the financial liabilities that come with an accident and homeowners insurance against the pitfalls of owning a home, life insurance is a product that protects people who would suffer if your financial support suddenly went away.

What life insurance is not is an investment. (You wouldn’t call your car insurance an “investment,” would you? It’s similar with life insurance: it’s a product designed to do a specific job.) And, like with any policy, it’s something you might want to have… but hope you never have to actually use.

So how do you determine if it’s something you absolutely want to have? There are a few times when your need will be obvious.

Watch Episode 11 of The Build below to learn more about life insurance.

The Obvious Case for Life Insurance

Even if you’ve considered it before, getting an insurance policy — beyond the one you might have as part of your benefits package through your employer — is probably low on your priority list.

After all, life is busy and you have other things to deal with. Dying suddenly at a young age seems so unlikely; it’s easy to think that someone like you doesn’t need something like life insurance.

But if you have a young family or support your household financially in any way… you probably do need some coverage. Why? Consider what you’re insuring when you buy life insurance: you are making sure that the beneficiary of your policy would not face some kind of hardship if you were to pass away and no longer financially provided for them.

Knowing that this is the purpose of life insurance, it’s obvious that you need a policy if you have children. Minors under 18 certainly depend on your income, but even young adults who might be in college or looking to get on their own two feet that you still support might need to be beneficiaries on your insurance.

You may also want life insurance if you have a spouse or significant other. The death benefit can cover large liabilities like your mortgage, charitable donations, and general living expenses during a grieving period when life for the surviving spouse needs to be figured out.

 

Single with No Dependents? You Might Not Need a Policy

A good rule of thumb for life insurance is that if someone would struggle to get by in any kind of way if you (and your income) disappeared tomorrow, it’s time to consider getting a policy to protect that person (or people).

But what if you’re single, you have no dependents, and you don’t have any debts or liabilities that would pass on to anyone else should you pass away?

 In these cases, you might not need life insurance because there’s no financial hardship to insure against.

 

One Big Exception to the General Rule: Non-Working Spouses

There is somewhat of an exception here, though, and most people forget to consider it. Let’s say you’re married, but don’t work. Your spouse provides the household income. In this case, it’s obvious that your spouse would need a policy so that you would not face a financial hardship if they were to die.

But what about you? Do you need life insurance if you don’t work or earn an income?

Yes! Here’s why: the cost associated with replacing the care and work you provide in your household or to your children is huge. What would it cost to have a full-nanny replace your role as stay-at-home-parent? What about daycare, housekeeping, personal chef services, and so on?

Your working spouse would certainly face a hardship if something happened to you, and would need to replace your labor in some way. Even if you don’t earn a paycheck from an employer, you need life insurance so your spouse could use the death benefit to keep up with the additional expenses they’d likely face without you.

 

What to Do Next?

Once you evaluate your need for life insurance, you need to determine what kind of policy to get. (And of course, if you don’t need life insurance — you may be all set in this arena and don’t need to include this in your financial planning.)

Most people need term life insurance, not whole life or permanent life insurance. Term life insurance covers you for a set period of time, and you don’t have to pay premiums once that term expires. With whole or permanent life, on the other hand, you always pay premiums.

Look for a product from an independent insurance provider like LLIS. There are other independent companies out there, too, and you should feel free to work with one you feel most comfortable with. What you want to avoid are “captive” agencies, which only sell their own products. These include brands like Allstate, State Farm, and New York Life.

An independent provider can look at the entire marketplace and help you get the best deal, so that’s why you want to start your search with them. A good step to take is to request quotes and start comparing potential options to find the best one for you.

The Biggest Question You Might Ask About Social Security Benefits: To Wait or Not to Wait?

Written by support@seostats.com on . Posted in Benefits, Retirement.

There aren’t many absolutes in personal finance or financial planning. But when it comes to Social Security, you can be almost certain you’ll face this decision that requires you to choose:

Should you start taking Social Security benefits at 62 — or should you delay to 66 or even 70?

Here’s what you need to know to answer this complex question, and to get it right to make sure you maximize your retirement income.

 

How Waiting (or Not) Impacts the Amount of Your Social Security Benefits

Your “full retirement age” is the magic number when it comes to Social Security income. Right now, the Social Security Administration defines the full retirement age as 67.

But that doesn’t mean you have to wait that long to claim your benefit and start receiving income from Social Security.

In fact, you can file for benefits as early as 62. The catch? You won’t get your full benefit. That doesn’t kick in until full retirement age, so the sooner you claim your benefits, the less you receive monthly.

Whatever you choose, you can find your specific benefit amount by going to SSA.gov and using their calculators to help you estimate the numbers.

Here’s how the benefit amount breaks down each year once you turn 62. If your full retirement age is 67, your Social Security benefit is reduced by:

●       About 30 percent if you start collecting at 62.

●       About 25 percent if you start collecting at 63.

●       About 20 percent if you start collecting at 64.

●       About 13.3 percent if you start collecting at 65.

●       About 6.7 percent if you start collecting at 66.

Again, once you hit 67 you can get the full benefit you’re entitled to… but if you wait even longer, you get even more than your “full” benefit.

 

Should You Delay Taking Social Security? Traditional Wisdom Says Yes

For this reason, the common advice around this issue suggests to delay taking Social Security benefits for as long as possible (assuming you can afford to do so, meaning you don’t need this as a source of retirement income).

Every year after 67 that you wait to file, your benefit increases by 8% which provides an obvious incentive for waiting. You max out what you can receive once you hit age 70, however, so there’s no reason not to take your benefits at that point.

When you think about those 8% annual increases over the full benefit, it can seem crazy to consider taking the lowest possible benefit at 62.

But I believe waiting to file for benefits is not always the best thing to do, because nothing is guaranteed in life.

 

The Case for Not Waiting to Claim Social Security

Yes, it’s true: If you wait, you get a bigger payout… but there’s a breakeven point (in terms of age) that you have to hit to make waiting worth it. And you need to live to that age to receive a larger total amount of dollars from Social Security from waiting and losing out on potential income because you didn’t claim your benefits sooner.

While the average life expectancy might be increasing, there’s no guarantee that you personally will enjoy good physical and mental health to not just make it to 90 or more, but to enjoy the ride along the way. I don’t mean to be depressing, but it’s a reality we need to consider if we want to maximize our money.

Take a look at this quote from an Investopedia Article by Melissa Horton. Horton does a great job explaining this issue:

If we assume the full retirement age for a retiree is 65 and he or she chooses to begin receiving Social Security income at age 62, his or her full retirement age benefit of $1,000 may be reduced by 20%, leaving the retiree with $800 each month. If the retiree’s co-worker with the same birth date and similar earnings history elects to receive his or her benefit at full retirement age three years later, the benefit may equal $1,000 each month.

 For the first three years, the first retiree received a total of $28,800 (or $9,600 per year) while the second received nothing. Once the second retiree starts receiving benefits, he or she receives $200 more each month, or $2,400 more each year than the first retiree. The Social Security break-even age is 77, or 15 years after the first retiree elected to receive benefits. After this point, the second retiree earns more over his or her lifetime than the first.

In other words, you have to live to at least 77 before the decision to claim your Social Security benefits at 62 starts to become financially questionable. For the 15 years in between, it’s actually a smarter play than the person who waited it out in hopes of getting a bigger benefit.

While conventional wisdom says to wait as long as possible to claim Social Security, it’s worth taking a closer look at the issue in the context of your personal and financial situation before making a decision based on a blanket rule.

Filing for benefits early means you won’t get your “full” amount — but it also means you’ll start receiving your checks earlier, which may be when you need the funds the most.

To make a final decision on the best Social Security strategy for you, work with an advisor who can help by running projections and testing various scenarios so you can better understand potential outcomes of the choices you make around claiming your benefits.

Will 30 Year Olds Ever Get To “Retire”?

Written by support@seostats.com on . Posted in Retirement.

If you’re in your 30s right now, you might feel that those golden years of retirement may never happen. Experts are predicting that Millennials will have to keep working until they drop dead. But can this really be true?

You might have heard that retirement isn’t what it used to be. In fact, who calls it the “Golden Years” anymore? These days, our vision of life in our 60s and beyond more than likely contains some version of ourselves working… working and seriously downsizing our lifestyle expectations.

But it’s not just a 30-something’s vision of the future: it’s already happening. Even older generations are facing a completely different retirement scene right now: they’re working longer, living longer, and they’re forced to rely less and less on Social Security.

So, what will retirement be like for people who are in their 30’s now?

 

30-Somethings Face a Different World Than Previous Generations

Back when Social Security was invented, the retirement age was set at 65. That seemed reasonable for the day, since the average life expectancy was around 62.

Today, people who retire at 65 need to come up with a “second chapter” because, well… with an average life expectancy almost 20 years longer, chances are there will be a second chapter.

And if your second chapter doesn’t involve some sort of income-producing activity, then you’re going to need a whole lot of money saved up before you can even think about signing up for painting classes, hitting the golf course, or whatever it is you plan on doing in retirement.

But things don’t look so good on that front. Take a look at how your elders are doing in that department…

 

Americans Don’t Seem to be Good at Saving. At ALL.

38% of Americans don’t save at all for retirement. Even for those who do save, the average savings of a 50 year old is only $42,797.

I’m not sure how everyone plans on affording retirement, but if they think Social Security will carry them through, they really haven’t been reading the news in the last 10 years! Social Security will be around, probably, but it’s predicted that it will cover only a fraction of your living costs.

 

Think Your Fortune 500 Career Will Save You? Maybe.

Maybe you feel invincible: you’re in your 30s, you have a well-paying job, and life seems rosy, retirement seems doable. I’m just going to play devil’s advocate with you for a moment: what if your job is no longer there in 20 years?

I don’t mean the exact job you hold right now. I mean your industry: it can change, making your type of job obsolete. Technology is advancing so fast that many jobs are going the way of the ten-cent candy bar. One of the most respected financial advisors in the nation, Ric Edelman, talks about this on the “Between Now and Success” podcast hosted by Steve Sanduski.

 

You Might Even be Peaking Right Now With Your Salary (Yes, in Your 30s)

You’re probably not going to have that Fortune 500 or otherwise high-paying job when you hit your late 40s or 50s.

I’ve seen it first-hand. When I worked at Morgan Stanley, you could look around the building and hardly see anyone over 50. Why? Because you either get too burned out to keep it up, or you make too much money and they replace you. Of course no one ever gets fired… they leave the firm for new opportunities (wink wink).

The older you get, the harder it will be to command the salary you are currently receiving.

 

What Can You Do?

I want to stress that there are things you can do right now, while you are in your 30s, to ensure you don’t end up destitute and unhappy during retirement. Start planning now for your next career. Then, start living below your means, or at least within your means. Finally, save for the unknown.

Need help with any of that? A financial planner can get you started on a pathway to a secure retirement- start now while you’re in your 30s!

Understanding Your Fee Schedule

Written by support@seostats.com on . Posted in Fees.

For most items or services you purchase, as a consumer, price tends to be pretty straight forward.  If you need a gallon of milk you can go to a supermarket, drug store, or gas station and know immediately how much the milk is going to cost you.  Understanding how much you are paying for a specific product or service, is usually a straightforward process.  Unfortunately, when it comes to hiring a financial advisor, pricing can be complex.

Last week, Betterment, the asset manager I use for my clients, published a “Quick Guide” to compare the costs associated with different asset managers.  This is a must read for anyone who invests.  While this guide does a great job of breaking down the investment fees you will incur across different platforms, it is only part of the story.

To help you better understand your fee schedule, I have a listed a few questions you should consider asking your advisor:

 

What services do you provide?  Investment management?  Financial planning?  Insurance sales?

The prices in this guide are for investing only. What this chart outlines is the fee associated with purely investment management, which is only helping you pick stocks, bonds, and make allocation decisions.

Investing is an important aspect of your financial plan, but it is only one part. Comprehensive financial planning is not included as a service in the “Quick Guide” examples.

 

Can you explain your fee structure?

Once you understand the specific services you are receiving the next step is to understand the associated fees. When I meet with a prospective client and we discuss my fees, I always ask what they are currently paying their advisor.

They usually go back to their current advisor and ask the question, “What is my fee schedule?”  Here is where the current advisor explains the management fee (usually 1%) and points them to the account statement to show the funds coming out quarterly.

Now it gets tricky.  Technically, the client may only be paying their advisor 1%, however, that is often only part of the fee.  If you hold any mutual funds or exchange traded funds in your account, you are also paying the company that manages the mutual fund or exchange traded fund product that you own.  The fee you pay these managers is called the expense ratio.  According to Morningstar, the average mutual fund expense ratio in 2014 was 1.19%.  Investors rarely see these fees coming out as these are commonly paid by a reduction in the fund share price.

In addition, investing in stocks, bonds, or mutual funds will often include transaction costs.  These are the costs incurred, by the investor, to buy and sell securities.  Transaction costs are not included in the management fee charged by your advisor.

Lastly, how is your advisor being compensated for the planning work and advice they provide?  Is it a flat fee amount? Is it an additional % of the assets?  Are you being charged hourly?

 

Do you receive any incentives for selling me specific investments?

I spoke about this topic a few weeks back in my blog post “Incentives Matter.”  This doesn’t mean that the investment they are suggesting is wrong for you, but wouldn’t you want to know if your advisor was financially motivated to sell you a particular product?

Anyone who provides financial advice (investment advisors, financial planners, brokers, financial advisors) should be transparent with their fee schedules and the corresponding services they offer.

Clearly understanding your fee structure is a critical part in evaluating the services you receive.

 

Looking for an Advisor? Read our free whitepaper “The Ultimate Guide for Choosing Financial Advice” to learn the questions you should be asking!

Incentives Matter!

Written by support@seostats.com on . Posted in Fees, Fiduciary.

In last week’s Wall Street Journal, one of my favorite writers, Jason Zweig, wrote an article entitled “Mutual Fund Fees: A Bad Incentive Fades Away” which highlights a known conflict of interest that exists in the financial services industry where advisors are paid by mutual fund companies to sell their proprietary products over other funds.

This payment could soon disappear with the Department of Labor’s expected move to the “fiduciary” standard and away from a “suitability” standard.

Many large brokerage firms and insurance companies are held to a suitability standard, which means they can recommend a product for you that only has to be deemed suitable, but not the best for your needs.  Registered Investment Advisors, or RIA’s, are held to a fiduciary standard which means they must recommend the best product and or strategy for you. (This video take a humorous approach but does a good job in explaining the differences)

I was recently reminded how important incentives are in all aspects of life.

On a late night trip to a walk in medical clinic, my daughter was diagnosed with an ear infection.  Pretty standard for a 6 year old. The doctor prescribed an antibiotic and she would be feeling better in no time.  The prescription was called in and we proceeded to our local pharmacy to pick it up.  While checking out I was stunned to see the antibiotics rang up to a price of $225?

I asked the pharmacist if this particular antibiotic was specifically prescribed for ear infections?  Nope.  For children?  Nope.  He couldn’t understand why this would be prescribed over a whole host of other drugs that would be 2% of the cost.

I decided to call the doctor and ask that very question.  I didn’t get through to the doctor but did get the physician’s assistant who said she would check.  Needless to say, when the PA returned to the phone she had already called in a new prescription for another antibiotic that was the same but cost $4.  When I informed the pharmacist about this he snickered and mentioned that the doctor must have been incentivized to prescribe this particular medicine.

What if I hadn’t know any better?  How often does this happen?

This doesn’t mean all doctors do this but like financial advisors, incentives do matter. In this case, the prescribed medicine was perfectly suitable for my daughter but I would have paid an extra 5525%!

This is an extreme example, however, as Zweig points out in his article, “Until advisers are paid solely by their clients, no one will be able to tell whether the advice is tainted”.