You Must Ask!

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On June 30th the Securities and Exchange Commission Regulation Best Interest (REG BI) went into effect.  The regulation establishes a best interest standard for those who sell financial products and earn commissions.  Reg BI aims to hold brokers to a higher standard and requires brokers to stop referring to themselves as financial advisors if they aren’t working under the fiduciary standard – the highest standard available.  Plus, it establishes more transparency through form CRS so that all advisors must succinctly disclose not only their compensation, but, a gives an overview of how their relationship with their advisor works.  Fee-only Registered Investment Advisors have always had to disclose these practices through form ADV Part II.

The problem is that Reg BI has now blurred the lines between salespeople and fiduciary advisors for consumers.  It puts the burden on consumers to ask since most will never read yet another disclosure form.  Plus, even more significantly, Reg BI does little to address the conflicts associated with fee-based advisors – those who can work for fees OR commissions OR BOTH.  People don’t really understand that fee-based advisors are very different than fee-only.  A dually registered fee-based advisor can decide which hat they want to wear and fee-only advisors only wear one hat – that which is in the best interest of the client.

The CFP Board didn’t help matters either when they decided back in March to remove the compensation descriptions from the member profiles on a website designed to help consumers select an advisor.  Apparently they weren’t able to verify how each advisor was or wasn’t paid.  So they simply removed it.  Instead, the CFP Board wants consumers to have a conversation with their prospective advisor to determine how they are paid.  Conversations with those selling products is usually called sales.  Sales carries lots of conflicts of interests.  And, you may not know, but most CFP’s are still able to sell products AND/OR charge fees.  A CFP is not necessarily a fiduciary.

So if you or someone you know is interested in hiring an advisor for the first time or switching advisors, here are a few tips to keep in mind:

 

  1. Ask for the new form CRS to obtain an overview on the advisor’s practices and read it.
  2. Look up how advisors are registered and if they have been disciplined on the SEC investment advisor search website
  3. Ask lots of questions of the advisor and if any red flags are raised back away.
  4. Know if an advisor is fee-only or fee-based – it’s CRITICAL!
  5. Look at the disclosures on the advisors website – if you fee references to FINRA or securities offered by… you can assume they are NOT a fee-only fiduciary advisor.
  6. Get a second opinion or two.
  7. Search for a fee-only advisor on NAPFA.org under Find-An-Advisor.

This article from Forbes provides more details if you are interested.

And if you have any questions about how these regulations or practices affect you, please call.

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