Financial Advisor Fees & Fiduciary Best Practices

Be careful about any advisor who is shy about the cost of their services.

This is our third article in a series discussing our approach to the Institute for the Fiduciary Standard’s Best Practices.  Previous articles are 401(k) to IRA Rollovers and Fiduciary Standards and Communicating Fiduciary Advice – on our website.  Retirement account rollovers were used to illustrate the importance of having an advisor who actually puts their clients’ best interest first.  The way your advisor communicates with you, including about fees, is important for helping you understand issues that may color their advice in their favor.

Until recently we have been concerned that a 60-day delay in implementing the Department of Labor’s Fiduciary Rule would foretell its demise. We are relieved that the delay will not be extended beyond June 9, 2017, when the provisions are scheduled to be effective.  Any advisor, to any retirement account, will be required to operate by the standards of the DOL Fiduciary Rule.  This is a huge step forward for retirement accounts.  The Fiduciary Best Practices are still very important.  Many investment decision do not involve retirement accounts and many financial decisions do not involve investments.  This article addresses Best Practice Item 4, which concerns the fees you pay for financial advice:

  1. Provide a written statement of total fees and underlying investment expenses paid by the client. Include any payments to the advisor or the firm or related parties from any third party resulting from the advisor’s recommendations.

Your advisor provides a good faith estimate of fees and expenses in writing during the starting phase of the engagement when the investment policy is agreed to. Thereafter, your advisor will offer to all clients and will provide, upon request, an annual good faith estimate in writing of total fees and expenses incurred by each client and paid to the firm or related parties because of my advice.

Resource Advisory Services never receives any compensation from any provider of investment products or services we recommend to clients – in keeping with the NAPFA Fiduciary Oath as published on our website.  We also adhere to the related CFP® Fee-Only method of compensation.

From the beginning of Resource Advisory Services, complete fees transparency has been our policy. We abandon estimates of hourly fees for projects, because we do not want clients making these decisions without a statement of the actual cost.  We are in this business and have the most control over our expenses.  We should clearly state the total cost of our Recommendations Reports and put the amount in your engagement agreement.  Guidelines for Recommendations Report Fees are available on our website.

We become quite specific about fees when we describe Ongoing Relationships within Recommendations Reports.  At that point, we are able to give a clear statement for the first year’s most likely total fees – in dollars – with our estimate of the range that can be reasonably expected.  The higher end of the range would imply greater wealth than expected, while the lower end would imply weaker results.  Each Quarterly Report includes a clear statement of total fees paid to Resource Advisory Services during the preceding twelve months – also in dollars. Guidelines for these fees are at Retainer Relationship Fees on our website.

We are comprehensive financial planners.  Transparency about fees means you should understand clearly what you will receive and what you will pay.  We are a resource that provides advice and service – Resource Advisory Services.  Although we manage investments, we believe investment management is no more that 50% of the value derived by our clients.  Click “What to Expect” above for more.

There is more to money than money®.

Contact J. David Lewis with DLewis@ResourceAdv.com. He is a passionate advocate for fiduciary, fee-only financial planning and has been associated with financial services since childhood in a banking family.  He founded Resource Advisory Services in 1985.  National Association of Personal Financial Advisors (NAPFA) was formed only a few years before. Lewis became a NAPFA-Registered Financial Advisor in 1986.  From September 2013 through August 2016, he served on its National Board of Directors. 

Communicating Fiduciary Advice

Resource Advisory Services has been proud to be a fiduciary since its founding. In 2016, we subscribed to The Institute for the Fiduciary Standard Best Practices, which are a clear code of conduct for what you should expect from your advisor. Recently we used 401(k) to IRA Rollovers, to illustrate the importance of these Best Practices for one type of transaction, where non-fiduciary advice costs consumers a great deal in unnecessary expense. That blog is one example of the broader standards you should expect in fiduciary commitment to your best interest whenever you get advice for any financial matters.  The second and third Best Practices further describes the experience you should get from your advisor. What to Expect, on the tab above, follows our typical relationships from your initial interest in being our client through an ongoing relationship. There, you can see how these next two Best Practices are woven throughout our work:

2.  Establish and document a “reasonable basis” for advice in the best interest of the client. Advice is given on a “reasonable basis” and a summary of this “reasonable basis” will be provided by your advisor, in writing, upon request.

3.  Communicate clearly and truthfully, both orally and in writing. Do not mislead. Make all disclosures and important agreements in writing. All important client agreements and disclosures are put in writing and no written or verbal statements are misleading.

For us, routine written delivery of the basis for our advice is a part of our workflow – not just on request. Before my earliest experience as a financial advisor, I understood that writing forces a very high level of discipline.  It helps develop and communicate the reasons our advice is the best advice we can give.  Writing enhances clarity for us advisors as much as it documents the basis for our recommendations.  If we cannot articulate our reasons in text, the advice probably needs more work to be sure it is in the best interest of our client. At the beginning of each relationship, we write specifically for each individual client’s situations in a Recommendations Reports, using language tailored specifically to their situation and ability to understand. Our Quarterly Reports continue by building a written diary for ongoing relationships.

Often, we want couples to discuss our advice in private, before a meeting with us. This gives an opportunity to consider the need for clarification in the meeting.  When we sit down together, they usually have an understanding of the issues and have done much of the work for both to be comfortable with the decisions made.  Then, we and our clients can revisit what was understood years after decisions were made.

Things don’t always go as expected. This gets to Best Practice Number 3.  When we are giving advice or reporting results, we know we must be very careful to avoid anything that might be misleading or misunderstood.  With our style of writing, we are forced to look for language that might unintentionally mislead.  As we monitor clients’ relationships, we have documents to compare what was expected with what actually happens.  It is easy to imagine things are on track when they are not.  Knowing we have written about our expectations holds us accountable to the things we said in giving advice.  If things are going off track, we and our clients are more likely to recognize when an adjustment is needed, instead of that uneasy feeling when we are not quite sure we remember what was said a few months ago.  The documents can reassure us, pinpoint why there is misunderstanding about what we expected and help find the best resolution if a change is needed.

The development of these Best Practices promises to be a reliable way people can know whether their advisor is truly acting in their best interest – A FIDUCIARY.

J. David Lewis, Principal

Fiduciary advocates push alternative approach

Yesterday, in a news conference to announce the Institute for the Fiduciary Standard Best Practices, I may have become a bit vocal when we were talking about how postponing the Department of Labor Fiduciary Rule.  After the call, one of the reporters contacted me for more discussion.  This morning I find myself quoted in a Financial Planning article by Andrew Welsch.

“David Lewis, a Knoxville, Tennessee-based planner, has already been explaining what the best practice to his clients via newsletters, blog posts and social media.

“Whatever the government does in terms of how they define fiduciary, we can always draw the distinction and be relentless about being public about what we are doing. If it doesn’t meet our standards, we can show to our clients how we are overcoming that,” he says.”  Click here to read the entire piece.

J. David Lewis

32 Years of Resource Advisory Services

This is a very important season for me.  On March 15, 1985, at the kitchen table, I signed the documents that created Resource Advisory Services, Inc. The business began operations on May 1 of that year.  Every year since, I remember those days, and that empty $100 a month office, with only a phone jack and RASI’s number to mark my business. I could not believe that I had actually tackled the startup.  Now, I walk through the office space, and cannot believe what has been created.  I stand in awe.  There have been many people who have played incredibly important roles, and there have been experiences that are amazing. Together, we have seen successes and stresses. Close personal relationships have been formed.  Clients have had children and grandchildren. Some have gotten married.  Some have handed over impressive wealth to children, charities, and others.  And, a few clients have died.  I have worked with heirs, as they sorted through the business affairs of a deceased person they truly loved, trying to pull life back together for themselves, and sometimes their children.  Among my clients, I have shared celebrations of unexpected good fortune.  And, I have helped keep people on track as they built wealth slowly over the years.  We have worked through issues, when people’s actions did not produce the results they desired.  It has been “a trip” and I do not know how to show my gratitude in a more meaningful way than this note.  Now, I look to the future with much the same mixture of emotions that I had during the season when I started this enterprise.  I expect to support more financial planners as they get a chance at these experiences for themselves and more clients.  Thank you, for your contribution to all this. 


I first sent these words to “my envelop and paper mailing list” in the early 1990s and still feel the same, especially my gratitude for all those who have helped us, in so many ways, all these years.  Click What to Expect for a description of our client relationships.   

J. David Lewis

 

401(k) to IRA Rollovers and Fiduciary Standards

 

The Institute for the Fiduciary Standard announced a list of twelve Best Practices for financial advisors last fall.  They define A Professional Code of Conduct that Resource Advisory Services subscribed to follow.  For this article, we present our thoughts on the first of these items, by using rollovers from 401(k)s to IRAs for an example.  Consider these Best Practices whenever you deal with a financial advisor for any purpose, including us.

  1. Affirm the fiduciary standard under the Advisers Act of 1940, common law and, if applicable, ERISA and DOL’s Conflict of Interest Rule, govern all professional advisory client relationships at all times. Fiduciary status, as required in law, applies at all times, in all client engagements and this affirmation is stated in writing.

So, what does this mean when someone is helping you move your investments from an employer’s 401(k) to an IRA at another financial institution?

Under the Advisers Act of 1940, a firm such as Resource Advisory Services is required to be a Registered Investment Advisor (RIA), because we are in the business of giving advice on investment securities. RIAs have a fiduciary duty to their clients, which means they have a fundamental obligation to always act in their clients’ best interests.

ERISA stands for Employee Retirement Income Security Act of 1974.  It protects the retirement assets of Americans, with rules requiring all employer sponsored retirement plans to ensure fiduciaries do not misuse employees’ assets.  When your investments are in a 401(k), they are protected by these fiduciary requirements.

“Common Law” defines the responsibilities of a fiduciary. Many court cases, all the way back to old English law, make it clear that a fiduciary can be held directly liable for failure to put the clients’ best interest ahead of all others, including their own personal interests.  If you are harmed because a fiduciary to your 401(k) does something in their interest instead of your best interest, you deserve to recover your loss from the fiduciary.

IRAs are currently different.  You can move money from your 401(k) to an IRA where the person, firm or website giving you advice is not required to be a fiduciary.  Instead they can be considered representatives of the firm selling you the securities in the IRA.  Since they are not required to be a fiduciary, they don’t have to act in your best interest.  Their real responsibility is to the employer who pays them.

When you move your money from a 401(k) to an IRA, always make sure all advice is from a true fiduciary.  Ask the question and expect clear proof.  Some firms waffle on this issue.  They will say they are a fiduciary when they recommend moving money to an IRA.  They may even charge fees for this advice.  Then they contend they are no longer fiduciaries when they are selling investments for the IRA and being paid by their employer.  It’s confusing when they take off the fiduciary hat and put on the salesman hat.  This is why the Fiduciary Best Practices include emphasis on acting as a fiduciary – “in the best interests of all clients at all times.”  At Resource Advisory Services, we know we are fiduciaries to all our clients, all the time – not just the retirement accounts we manage.

The DOL Fiduciary Rule is intended to extend fiduciary protections to IRAs, for the same safety as 401(k)s. It seemed ready for implementation in April 2017, after many years of negotiation, development, review and court testing.  Our Department of Labor is now attempting to delay the implementation “for further review,” which may mean finding a way to end the rule.  When I raised this issue with our elected official, the response included:

However, even though DOL claims they are providing more transparency and accountability on fees tied to retirement accounts, the final rule goes too far and will make it difficult, if not impossible, for low- and middle-income Tennesseans to access the qualified retirement education and advice they need.” 

With 32 years working as a fiduciary, I am totally satisfied that there are and will be plenty of quality advice resources available for all Tennesseans under the Fiduciary Rule.  Delaying it harms the “low- and middle- income citizens” more than anyone.  Whatever happens on this delay, rest assured you and people you know can find fiduciary standards at Resource Advisory Services and other firms.  If you want your government to help the general public, click here to send your message to your elected officials.

Read the Forbes article The Ironic Conflict Of Interest Of The Fiduciary Financial Advisor for more insight into why Resource Advisory Services promotes the idea that all financial advisors and Financial Planners should be fiduciaries.

Contact J. David Lewis with DLewis@ResourceAdv.com. He has been associated with financial services since childhood and is a passionate advocate for fiduciary, fee-only financial planning.  He founded Resource Advisory Services in 1985.  National Association of Personal Financial Advisors (NAPFA) was formed only a few years before. Lewis became a NAPFA-Registered Financial Advisor in 1986.  From 2013 to 2016, he served a three-year term on its National Board of Directors.