Buyer Beware

Be A Cynic On Financial Advice

Tim Quillin
Special to the Arkansas Democrat-Gazette

Editorial on 05/12/2018

Commission-based insurance and stockbrokers continue to fight regulations that would require them to put their clients' interests ahead of their own, while peddling products--whole-life insurance policies, variable annuities, front-end load mutual funds--that put money into their pockets instead of yours.

If you have the right personality and disposition, you're better off managing your own money.

The Securities and Exchange Commission recently proposed a rule that would establish a standard of conduct that broker-dealers should "act in the best interest of the [retail] customer." Yes, the rule's radical notion is that insurance brokers and stockbrokers should act in their clients' best interests. Unfortunately, the SEC's remedy would consider this obligation satisfied as long the brokers disclose their conflicts of interest. It appears that brokers would still be able to sell you products in the guise of advice as long as they say, "Just so you know, we're salespeople."

The SEC's proposal comes after the Department of Labor worked for more than two years to establish a similar rule, only to have it struck down by a federal appeals court that held that brokers "are compensated only for completed sales," not advice, and so shouldn't be held to a best-interest standard.

In other words, you can't blame a salesperson for selling.

While I support the regulatory efforts to encourage the brokerage industry to act in the best interest of its clients, this is probably not an issue that will be solved by government intervention.

Folks, we need to assume that many of the people who give financial advice are not always looking out for us. In the financial world, we need a healthy level of cynicism.

In most cases, financial brokers have inherent conflicts that make it hard for them to provide unbiased advice. If you go into an insurance broker's office looking for help with financial planning, you may or may not get valuable assistance, but it's almost certain you'll walk out with an insurance policy or annuity. A stockbroker might earn sales commissions from certain mutual funds and therefore push you into investment choices that generate the highest fees for the broker rather than the highest returns for you.

The brokers I know are good people who firmly believe in the products they sell. They aren't trying to swindle anyone, but it's difficult for them to give impartial advice when one option puts zero dollars into their pocket and the other option helps feed their family.

A better alternative is a fee-only financial adviser who is paid a percentage of assets under management (AUM). AUM fees create their own set of potential conflicts, as advisers might prefer that clients deposit funds into managed accounts rather than pay down debts or contribute to employee-sponsored retirement plans. However, I know many ethical AUM-fee advisers who put their clients' interests first. These advisers might also provide a steadying influence on investors prone to sell in panic when the stock market collapses or buy while euphoric when the market's soaring.

If you can take a long-term view, though, and stick to a plan, you are better off managing your money yourself. Brokers argue that if they can't make money from insurance and mutual fund commissions, they won't be able to help investors with modest nest eggs who may not have sufficient assets to afford an AUM-fee adviser. Don't fall for that.

No advice is better than bad advice. You are better off on your own than you would be getting financial assistance from someone who only makes money if they sell you something.

You can develop a basic financial plan by yourself or with the guidance of an hourly-rate financial planner, a new breed of adviser with no conflicts and reasonable fees. Focus on spending less than you make. Set aside cash for predictable budget-busters like home repairs. Save at least 10 percent in your 401(k) and IRAs. Invest in low-fee, target-date index funds, which buy an age-appropriate mix of stocks and bonds and automatically adjust over time. If your 401(k) doesn't have target-date index funds, ask why not. Finally, just be consistent. Save and invest through all the ups and downs of the stock and bond markets.

Look, financial advice can be valuable. It's just expensive. If you are paying commissions or AUM fees to a broker or adviser, a lot of your hard-earned savings is going to end up in someone else's pockets. You can do it yourself, simply and prudently. Keep the money in your pocket.

That's some advice that really is in your best interest.

Tim Quillin is a chartered financial analyst and a partner at Aptus Financial in Little Rock.

Tim Quillin