burned and Michael Kotin was his Wells Fargo Advisor. see eg
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Mutual Funds
Before the Advice, Check Out the Adviser
WHEN
Elaine and Merlin Toffel, a retired couple in their 70s, needed help
with their investments, they went to their local U.S. Bank branch. The
tellers knew them by their first names. They were comfortable there.
So
when a teller suggested that they meet with the bank’s investment
brokers, the Toffels made an appointment. After discussions and an
evaluation, the bank sold them variable annuities, in which they invested more than $650,000. The annuities promised to generate lifetime income payments.
“We
wanted to make the most amount of interest we could so if we needed it
to live on, we could use it,” said Ms. Toffel, 74, of Lindenhurst, Ill.
What
she says they didn’t fully understand was that the variable annuities
came with a hefty annual charge: about 4 percent of the amount invested.
That’s more than $26,000, annually — enough to buy a new Honda sedan
every year. What’s more, if they needed to tap the money right away,
there would be a 7 percent surrender charge, or more than $45,000.
Michael
Walsh, a spokesman for U.S. Bank, said that the investments were
appropriate for the Toffels, that fees were disclosed and that the sale
was completed after months of consultations. But the Toffels now
question whether they were given financial advice that was truly in
their best interests. Like many consumers, they say they didn’t realize
that their broker wasn’t required to follow the most stringent
requirement for financial professionals, known as the fiduciary
standard. It amounts to this: providing advice that is always 100
percent in the consumer’s interest.
Many people think that they are getting that kind of advice when they are not, said Arthur Laby,
a professor at the Rutgers School of Law and a former assistant general
counsel at the Securities and Exchange Commission. “Brokerage customers
are, in a certain sense, deceived,” he said. “If brokers continue to
call themselves advisers and advertise advisory services, customers
believe they are receiving objective advice that is in their best
interest. In many cases, however, they are not.”
Brokers,
like those at the Toffels’ bank, are technically known as registered
representatives. They are required only to recommend “suitable”
investments based on an investor’s personal situation — their age,
investment goals, time horizon and appetite for risk, among other
things. “Suitable” may sound like an adequate standard, but there’s a
hitch: It can mean that a broker isn’t required to put a customer’s
interests before his own.
There
are some specific situations when brokers must act as fiduciaries — for
example, when they collect a percentage of total assets to manage an
investment account, or when they are given full control of an investor’s
account. But under current rules, a broker can take off his fiduciary
hat and recommend merely “suitable” investments for the same customer’s
other buckets of money. Confusing? Absolutely.
“While
many brokers do right by their clients, others push bad products at
high prices,” said Knut A. Rostad, the regulatory and compliance officer
at Rembert Pendleton Jackson, an investment adviser, and a longtime champion
of requiring a uniform fiduciary standard for brokers. “They do so
because their culture celebrates sales. They do so because they can.”
IT’S a bewildering situation for consumers, particularly as they try to figure out which advisers do follow a fiduciary standard: Investment advisers, who generally must register with the S.E.C. or a state securities regulator, must put their customers’ interests first, regardless of what accounts they are working with.
This
creates a muddle for investors. Say you sit down with a broker — one
who isn’t legally required to act as a fiduciary — and the broker has
access to a dozen mutual funds,
all of which are deemed “suitable” for a particular customer. The
broker can recommend the most expensive fund, even if it makes him more
money at the consumer’s expense and isn’t preferable in any other way,
Professor Laby said.
On
the other hand, if advisers are following a fiduciary standard, the
proper course is clear: “They have to recommend the one that is the
lowest cost” because that will be in a consumer’s best interest, he
added.
Regulators
have been considering whether stronger rules are needed. The Dodd-Frank
financial regulatory law of 2010 gave the S.E.C. the authority to
propose a rule that would require brokers to act as fiduciaries — but
the law didn’t actually require the S.E.C. to enact new regulations. The
agency hasn’t yet decided whether it will move forward. Two Republican commissioners have publicly questioned whether it is necessary.
The Labor Department expects to issue a new proposal in January for a rule that would broaden fiduciary requirements for retirement accounts. In 2010, the department withdrew an earlier proposal after fierce opposition from the financial services industry.
Investors can’t simply accept an adviser’s title at face value. For example, certified financial planners,
a professional designation with some of the more rigorous curriculum
and experience requirements, pledge to put their customers’ interests
ahead of their own when providing advice — and can lose their
designation if they don’t. But even they do not have to act as
fiduciaries if they are just selling an investment without including any
advice, said Craig W. Lemoine, a program director at the American College of Financial Services in Bryn Mawr, Pa.
To
make matters worse, many brokers call themselves “advisers,” a term
that suggests consumers can unequivocally trust their counsel much as
they might trust the family physician’s. Merrill Lynch, for instance,
recently introduced an approach called Merrill Lynch Clear
— which is essentially a way for the company to set up a conversation
with customers about their longer-term goals and priorities, including
family or health issues or whether they need long-term care insurance. Merrill advertises this approach on its website as a conversation with a “trusted adviser,”
though not all of its “advisers” are legally bound by a fiduciary duty.
Matt Card, a Merrill Lynch spokesman, says the firm’s focus on
customers’ broad goals is designed to put a client’s interests first,
regardless of whether its representatives are acting as fiduciaries.
Even
if stronger protections are enacted, some advisers at financial firms
may face potential conflicts of interest, depending on issues like sales
goals or incentives that encourage them to push financial products that
aren’t ideal for customers.
A
former senior account executive at Fidelity, who left last year to join
a small independent firm, said he was given sales targets that helped
to determine whether he would receive bonuses or retain his job. (He
spoke on condition of anonymity, saying he needed to protect colleagues
who were still at the company.)
“By
far, the biggest two weightings were on your ability to sell annuities
and portfolio advisory services,” he said, referring to a program in
which Fidelity investment accounts are managed for a fee. “So if you hit
all the other goals but missed one of these two, there was a good risk
that you could be put on verbal or written warning and quite possibly
terminated.”
Joseph
Madden, a Fidelity spokesman, said representatives’ compensation is
based on whether their advice was appropriate for the customer, as well
as other factors related to sales, service and customer satisfaction.
Advisers’ pay can provide clues about whether their interests may be mismatched with consumers’.
At
the largest brokerage firms — Merrill, Wells Fargo, UBS and Morgan
Stanley — there are incentives to bring in new money. These firms
typically pay their brokers and advisers 45 to 55 percent of fees and
commissions generated for their companies, explained Alois Pirker, research director of wealth management at the Aite Group, which tracks and advises the financial services industry.
“They are very much hunters,” he said. “They are hunting for assets.”
Some
brokers may collect a higher percentage of the money they generate for
the firm once they hit certain thresholds. That may reward hard workers,
as outlined in a 2013 report
from the Financial Industry Regulatory Authority, the brokerage
industry’s private self-regulator. But it could also encourage an
increase in the number or a shift in the types of recommendations that
brokers make to customers.
Conflicts
can also arise when a brokerage firm receives money from, say, a mutual
fund provider through a practice known as revenue sharing: Those funds
may land on a “preferred list,” which a broker may favor.
It
may be less confusing for consumers to simply pay for advice through
“fee-only” independent financial planners who are fiduciaries.
Independent planners typically charged from 0.85 percent to 1.15 percent
of assets at the end of 2013, according to Cerulli Associates, though
fees can vary depending on how much you have to invest. (There is always
the additional cost of the underlying investments, though they can be
quite low.) Often, in addition to investment advice, those fees cover
issues like how much to save or how much term life insurance to buy.
Other advisers charge a single flat fee or hourly fees. The National Association of Personal Financial Advisors and the Garrett Planning Network are groups of fee-only planners, while a network of advisers, called the XY Planning Network, charges subscription fees, typically around $100 a month.
IF consumers really want to put prospective advisers to the test, they could try a direct approach: Ask them to sign an oath stating they will act as fiduciaries, like the one recently created by the Committee for the Fiduciary Standard, an advocacy group. Andrew Stoltmann, a securities lawyer in Chicago, said such an oath would be binding in an arbitration proceeding,
which is how a vast majority of customer disputes are settled. “If the
adviser refused to sign it, then the investor should run for the hills,”
he said.
A
fiduciary pledge doesn’t protect an investor from outright chicanery,
however. Consider the case of the former Seattle investment adviser Mark
Spangler, who was sentenced
to 16 years in prison for defrauding customers and money laundering. He
previously served as a chairman of the National Association of Personal
Financial Advisors, a group whose advisers pledge to act as fiduciaries.
Barbara Roper,
director of investor protection at the Consumer Federation of America,
said a fiduciary standard might protect people from brokers who are
acting legally but who aren’t recommending the best options for them.
“Evidence overwhelmingly suggests that investors suffer real financial
harm — albeit unquantifiable harm — as a result of so-called ‘advice’ to
invest in products that have high costs, that expose them to
unnecessary risks or that simply offer mediocre performance relative to
other options,” Ms. Roper said.
The
Toffels, who bought their investments through their bank’s brokerage
unit, now wish they had taken much more care in choosing their advisers.
“We thought they could help us invest our money smartly and soundly and
that just hasn’t happened,” Ms. Toffel said.
When
the couple initially went to the bank for investment help, they had a
portfolio of low-cost Vanguard funds, with an allocation in the stock
market that was probably too high, according to the Toffels’ son-in-law,
Christopher Lombardo. But following the bank’s advice, instead of
merely adjusting that portfolio, they sold it and paid taxes on the
capital gains. They put most of their money in the annuities, which were
invested in mutual funds and paid 5 percent each year.
But the illiquidity of the annuities caused serious problems last year, Ms. Toffel said.
While
the couple followed the bank’s suggestion and held more than $200,000
in money market funds, they found that they were short of cash because
their life situation had changed: Mr. Toffel, 78, received a diagnosis
of Alzheimer’s and needed to move into a skilled nursing facility, while
Ms. Toffel wanted to buy an apartment in the same senior community. But
much of their money was locked inside those very costly annuities,
which carried the 7 percent surrender charge.
“I was sick about it,” said Tammy Lombardo, the couple’s daughter.
Her
husband, Mr. Lombardo, has spent many hours documenting their
predicament and petitioning the bank for a hardship withdrawal, which
has been successful.
They
ultimately received some of the money from the annuities without paying
the surrender charge, but they are still trying to undo other changes
made by the bank to their financial arrangements.
“It’s been a mountain of red tape and hoops to jump through,” Mr. Lombardo said.
________
Gauging the Advice
BROKERS OR REGISTERED REPRESENTATIVES
Required
to make “suitable” recommendations to investors based on criteria like
age, goals, time horizon and risk appetite. Generally not required to
put customers’ interest first at all times, a standard called fiduciary
duty.
Background
Check: For information on a specific broker, try the BrokerCheck
website, at finra.org/Investors/ToolsCalculators/BrokerCheck/. It covers
brokers and firms registered with the Financial Industry Regulatory
Authority, or Finra, Wall Street’s self-regulator. But Finra’s system
has been criticized because some brokers have had complaints expunged
from their records.
REGISTERED INVESTMENT ADVISERS
Required
to put customers’ interests ahead of their own — that is, they are
required to act as fiduciaries. Advisers and their firms generally
register with the Securities and Exchange Commission or a state
securities regulator.
Background
Check: For information on specific advisers, try the Investment Adviser
Public Disclosure website, reachable at adviserinfo.sec.gov. It scans
S.E.C. data, as well as BrokerCheck and state securities regulators’
sites.
BE SURE TO ASK
Because
some people giving financial advice are dually registered as brokers
and investment advisers, ask them which hat they are wearing — and
whether they are acting as fiduciaries. Then get it in writing.
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