Is Your Financial Advisor a Fiduciary?

Posted on June 22nd, 2009 in Investments, Newsletter Articles by wayne


Did you know that many financial advisors are not required to act in the role of a fiduciary?  Many financial advisors are instead subject to a business standard that only requires that the recommended investments be “suitable” for their clients.  Other financial advisors are subject to a more strict fiduciary standard which means the advisor has “a duty to act in the best interests of their client.”

To understand the difference, we must look at the current regulatory environment.  Commissioned based brokers or a broker-dealers are regulated by the Financial Industry Regulatory Authority (FINRA).  Brokers are often called “registered representatives” and work for such firms as Merrill Lynch, Smith Barney, Edward Jones, Wachovia, UBS or Wells Fargo.  Insurance agents, who offer investment products, are also almost always brokers.

FINRA only requires registered representatives and broker-dealers to provide a “suitable” investment to their clients, based on the client’s financial situation and their other holdings.  FINRA does not require for registered representatives and brokers to act in the client’s best interests.  Since FINRA only requires the “suitable” business standard, the registered representative or broker-dealer does not need to disclose any potential conflicts of interests that their investment advice might include.  This often leads to a broker recommending a product with a commission fee (load) when the same product is available as a “no-load” product.

Investment advisors, often called registered investment advisors or RIAs, are a different type of financial advisor.  RIAs are regulated by either the SEC or their state securities regulator.  RIAs are subject to the Investment Advisory Act of 1940, which requires that they have a “fiduciary duty to act in the best interests of their client”.  Investment advisors are paid through a fee structure, either on an hourly basis or as a percentage of assets under management (AUM).  RIAs are typically “fee only” advisors that do not receive any commissions and are always held to a fiduciary standard.

Some financial advisors present themselves as “fee based” advisors.  These advisors will be acting in the fiduciary capacity of an RIA when providing financial planning advice and typically charge a fee for this advice.  However, when these same advisors implement the proposed plan, they sell commissioned-based products.  When they sell commission-based products, they are operating as a registered representative/broker and are regulated by FINRA.  When these products are sold, the advisors are no longer acting as a fiduciary and need only to meet the “suitable” standard for the product that they sell..

If this seems confusing, you are not alone.  New government regulatory proposals are intended to undo this morass.  However, it is unclear how a broker can maintain a fiduciary relationship with their client while selling a commissioned based product, when a similar (or even the same) non-commissioned product is available.  

Since major banks, brokerages and insurance companies are dependent upon the revenues from their commissioned based products, it is doubtful that registered representatives who sell these products will ever be required to have a fiduciary duty when selling products to their clients.   Hopefully the new regulations will require the up-front disclosure of the commissions being paid to the sales person for each product sold, before it is sold, as well as any other potential conflicts of interest.  With this disclosure, the consumer will know how much of the total cost of the products is being used for compensating the broker-dealer and the sales person.

I believe that every financial advisor should have a fiduciary duty to put their client’s interest before their own.  However, until government regulations require this, consumers should be aware of the difference between commissioned based sales people with only a “suitability” standard and fee only planners who have a fiduciary duty to their clients.

Tax Relief for Everyone

Posted on June 22nd, 2009 in Newsletter Articles, Retirement Planning, Taxes by wayne


There is a simple, easy to use tax reduction tool, currently available to 90% of all US taxpayers.  In 2010, this tool will be available to everyone.  Unfortunately, only 19% of all taxpayers currently take advantage of it.  Do you know what it is?

If you guessed the Roth IRA, you’re correct.  Like a traditional IRA, a Roth IRA is a personal savings account in which funds grow tax free.  Unlike a traditional IRA, when Roth IRA funds are withdrawn, in a qualified withdrawal, no taxes are due on either the funds or their investment growth. 

With the growing federal deficit, it is probably safe to assume that your tax bracket in retirement will be close to your present tax bracket.  If so, the Roth IRA will always yield a higher after tax return than a traditional IRA.  This holds true even when if you invest the tax savings from your traditional IRA contribution.    

Another advantage of a Roth IRA is that there are no mandatory distribution requirements.  With a traditional IRA or a 401(k) plan, you must begin taking withdrawals and paying taxes on the withdrawn funds at age 70 ½, even if you do not need these funds.

Because there are no mandatory withdrawal requirements with a Roth IRA, they can be an excellent estate planning tool.  If you do not need your Roth IRA funds during retirement, the Roth IRA funds can be passed to your heirs.  The inherited Roth IRA funds remain income tax free when withdrawn by your heirs.  An inherited Roth can have a mandatory distribution schedule that is based on the expected lifetime of the heir.  This allows most of the Roth IRA funds to continue to grow tax free throughout a second lifetime. 

If you earn less than $105,000 as an individual tax filer or less than $166,000 as a joint filer, you can annually contribute up to $5,000 ($6,000 if age 50 or over) to a Roth IRA, even if you are covered by a qualified company retirement plan. 

Many financial advisors recommend that you put the maximum amount possible into a tax deferred retirement account, such as a 401(k) or 403(b).  However, it is often wiser to put the maximum amount that your company will match in the tax deferred retirement account and put the next $5,000 ($6,000 if age 50 or over) of retirement savings into a Roth IRA. This approach will maximize your after tax retirement funds and maximize your withdrawal options during retirement.

Converting tax deferred funds from a traditional IRA or 401(k) to a Roth IRA is often wise, especially if you may not need all of your tax deferred funds during retirement.  Currently, if your annual income (AGI) exceeds $100,000, this type of conversion is not permitted.  However, this income limitation for a Roth IRA conversion will soon disappear.  

Starting in 2010, everyone will be able to do a Roth IRA conversion, regardless of income level.  With a Roth IRA conversion, you must pay current taxes on the amount converted.  Once these funds are converted, you never pay income taxes on these funds and their investment gains again. 

There is an additional incentive to convert funds to a Roth IRA in 2010.  Taxes owed on funds converted in 2010 can be spread over two tax years.  In 2011 and beyond, 100% of the conversion taxes must be paid in the year of the conversion.

A Roth IRA conversion should only be considered if you have adequate additional savings to pay the taxes due without using the converted funds.   If you will need any of the converted funds within five years, do not convert these funds.  Funds withdrawn within five years will likely be considered a non-qualified distribution, requiring the payment of a 10% penalty on any funds withdrawn.

With the enormous expansion of government debt, it seems likely that income and capital gain tax rates will soon rise.  Whether you are eligible now, or must wait until 2010, the benefits of having a Roth IRA should be considered as part of your personal financial plan.