“…back-door payments or hidden fees for steering people into bad retirement investments that have high fees and low returns…”
On February 23, 2015, President Barack Obama threw his support behind a forthcoming (as of the writing of this article, it had not been released) Department of Labor fiduciary standard. According to a White House fact sheet, conflicted advice costs the average investor 1% every year.
The President’s Council of Economic Advisors further clarified what consisted of conflicted advice. It cited four areas:
- Revenue sharing agreements, or 12b-1 fees. Basically, it’s a kickback to the advisor that puts his client in a certain fund.
- Loads. These are commissions paid straight to the advisor who puts a client into these funds. Read more: “Please Stop Paying Commissions for Loaded Funds”
- Sales targets and payouts. This is when an advisor gets a bonus for putting clients into certain investments, most likely proprietary products (think hedge funds, closed ended REITs, etc).
- Variable commissions. The commission may be higher based on different products. Think indexed universal life insurance policies.
According to the Investment Advisers Act of 1940, Section 211(g)(1),
…The Commission may promulgate rules to provide that the standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may by rule provide), shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice. In accordance with such rules, any material conflicts of interest shall be disclosed and may be consented to by the customer…
Pretty simple. Receive personalized investment advice, and you should be getting it from someone who lives by a fiduciary standard – meaning that they put your best interests ahead of their own.