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Whose Side are Financial Advisors On?

The April 23 PBS Frontline episode was the most-watched edition of the news magazine since the presidential elections—and with good reason.

Titled “The Retirement Gamble,” it tapped in to a concern that really hits home with Americans these days: Whether we will be able to retire comfortably without outliving our savings. For some, the question is whether retirement itself is even possible. As the program’s high ratings suggest, the topic is important and relevant.

But the Frontline edition also made waves for another reason. It revealed that roughly 85% of financial advisors are not fiduciaries. A fiduciary is a person or entity that has a legal duty to act in the best interests of the beneficiary. In other words, the majority of financial advisors are not required to put their clients’ interests before their own. (You can find a recording of the program here.)

Most people are stunned by this fact. They assume that all advisors have an obligation to put your interests first. In fact, only advisors who have fiduciary status must meet this standard. The truth is that most
“advisors” are technically investment brokers or insurance agents—and within the industry, it’s well-known that they are not fiduciaries.

First of all, brokers are not independent, objective agents but rather employees of firms like Merrill Lynch, Edward Jones, Morgan Stanley or Prudential, as well as others. Their first obligation is to their employers, not their clients. It’s been well documented that brokers and agents face pressure from their companies to push certain products rather than making completely unbiased recommendations.

What’s more, brokers are paid commissions when clients buy the products they recommend. And the fact that different products pay them different levels of sales commission means they may not always have clients’ best interests at heart.It’s true that most brokers are good people, but nonetheless, they work in a conflicted business environment in which their employer’s success may be the first priority, their own may be second, and yours may be third.

The only way you can be sure to avoid conflicted advice is to work with a fiduciary advisor. Most fiduciary advisors are known as registered investment advisors (RIAs). RIAs—of which FPC is one—are legally bound to put your interests first. Fiduciary advisors are typically compensated through a set fee. Set fees reduce or eliminate conflicted advice, and they are also easier to understand. And typically,since the fees they earn are based on the amount of assets being managed, the arrangement provides additional incentive for the fiduciary to make sound decisions that will sustain and grow your assets. In the event that conflicts of interest arise, fiduciary advisors are legally obligated to fully disclose those conflicts.

With old-style pension plans becoming a thing of the past and with Social Security looking shaky, Americans are more responsible than ever for preparing for their own retirement and reaching their financial goals. When they choose to work with an advisor, the least they should expect is that the advisor is truly on their side.

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