Sunday, June 21, 2009

RIA versus Broker: What’s the Difference?

Although this has been a hot topic in the industry for quite a while, the general investing public does not understand the difference between a broker and an advisor. So, what’s the difference? and why should you care?

It’s actually pretty simple:

RIAs registered with the Securities and Exchange Commission are governed by the fiduciary standard that requires advisors to act in their clients’ best interests. This fiduciary standard of care is the highest know to law and, given a choice, most plan sponsors would prefer to have an advisor who is a “co-fiduciary”. Wouldn’t you prefer to work with someone who is required by law to put your interest first?

On the other hand, broker-dealers registered with the Financial Industry Regulatory Authority (FINRA) are held to the suitability standard that requires them to make recommendations that fit a client’s risk tolerance, objectives and financial status. In other words, brokers are trained and monitored to make sure that they are providing suitable investments, but normally stop short of accepting co-fiduciary status.

At the end of the day, it will depend on the individual broker or advisor, of course…there are great people on both sides of industry. But you might want to think about what happens when the chips are down and you want someone to share, in writing, the fiduciary responsibility

Do You Know Your 401(k) Expenses?

I had a meeting this week with a company who had no idea that his insurance company vendor was paying a subsidy to the Third Party Administator. How do you know if you are getting good value if you can’t account for all the expenses?

I also noticed that the State of Alabama cancelled their deferred Compensation arrangement with Nationwide, and wanted to pass along the following comments:

1) The State Personnel Board cited a lack of financial transparency Wednesday when it canceled a contract with Nationwide Retirement Solutions to provide a deferred compensation plan for active and retired state workers in Alabama.

2) “We’ve leaned over backward to ask these people to come square,” board Chairman Joe Dickson of Birmingham said.

3) Board members say they were unaware the 1994 agreement provided for Nationwide, based in Columbus, Ohio, to make large payments to ASEA. The association’s tax returns show those payments have reached almost $6 million since 2002, board attorney Alice Ann Byrne said Wednesday.

If you are in charge of a 401(k) plan, be sure to ask - in writing - for a total list of fees associated with your plan. Not only is it in the best interest of participants, but it’s good business, as well.