The Biggest Myth
WATCH FOR THESE
RED-FLAGS
So, how do you know if you’re dealing with a conflicted broker or a loyal
fiduciary? There are several red-flags
to look for:
1. Get explicit documentation on
your consultant’s total sources of
revenue. This information should
be included in the annual 408(b)
(2) disclosure. If your consult
accepts anything other than an
explicit hard-dollar fee for services, then there may be a conflict
of interest.
interest or for their clients.
Take a moment and watch this video. It
explains the difference between a broker
and fiduciary quite well: www.youtube.
com/watch?v=Dg5RRMAc1GY.
In the video, brokers are compared
to neighborhood butchers selling their
wares, whereas fiduciary consultants are
compared to dieticians, trying to make
the best recommendations for your overall health. There’s nothing wrong with a
knowledgeable butcher but – in the end
– they are salesman. Your butcher will
never recommend going next door to a
competing fishmonger, or buying from
the fruits and vegetable store instead.
So, it’s a simple solution: just hire a
fiduciary investment consultant and you
are set, right?
Not so fast! Business Insider ran an
exposé of a fiduciary investment consultant. www.businessinsider.com/will-thereal-butchers-please-stand-up-2012-3
Business Insider discovered the fiduciary firm had a significant conflict of
interest because they were affiliated with
a broker-dealer. The firm had financial
incentives to sell you their own products.
Or, as Business Insider put it, “the dieticians own a butcher shop.”
How can fiduciary firms get away with
this obvious conflict of interest? The
biggest reason is that brokers can dualregister as brokers and fiduciaries. In
other words, these fiduciaries can easily
revert to act like a salesman, subject only
to a suitability standard, when selling
their products.
In reality, the biggest brokerage firms
are filled with so-called fiduciary advisors who wear multiple hats, selling
on-platform products with embedded
fees whenever possible, despite the best
interest of the client. In short, being
a fiduciary won’t protect clients from
conflicts of interest. n
2. Does your consultant prefer to
have custody of assets? Do they
use an investment platform with
specially vetted mutual funds,
separately managed accounts, or
alternative investments? These
products typically have special
revenue and incentive arrangements, and there may be a conflict
of interest.
3. If your consultant requires a Series
7 license to practice, they may
be dual-registered with a broker/
dealer and there may be a conflict
of interest.
4. How big is the disclosure? How
complex? If the disclosure is
filled with pages of small print
and “Legalese”, it becomes easier
for brokers to continue business
as usual without taking your best
interests in mind.
www.conferomag.com
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