Only a small percentage of financial advisors are Registered Investment Advisors (RIA). Federal and state law requires that RIAs are held to a fiduciary standard. Most so called “financial advisors” are considered broker-dealers and are held to a lower standard of diligence on behalf of their clients. The following excerpt discusses how evaluating the way an advisor is compensated can help you determine their fiduciary standard.
One of the best ways to judge if your financial advisor is held to a Fiduciary standard is to find out how he or she is compensated.
Fee-Only Compensation -
This model minimizes conflicts of interest. A Fee-Only financial advisor charges clients directly for his or her advice and/or ongoing management. No other financial reward is provided, directly or indirectly, by any other institution. Fee-Only financial advisors are selling only one thing: their knowledge.
Some advisors charge an hourly rate, and others charge a flat fee or an annual retainer. Some charge an annual percentage, based on the assets they manage for you.
Fee-Based Compensation -
This popular form of compensation is often confused with Fee-Only, but it is very different. Fee-Based advisors earn some of their compensation from fees paid by their client. But they may also receive compensation in the form of commissions or discounts from financial products they are licensed to sell. Furthermore, they are not required to inform their clients in detail how their compensation is accrued. The Fee-Based model creates many potential conflicts of interest, because the advisor’s income is affected by the financial products that the client selects.
Commissions -
An advisor who is compensated solely through commissions faces immense conflicts of interest. This type of advisor is not paid unless a client buys (or sells) a financial product. A commission-based advisor earns money on each transaction-and thus has a great incentive to encourage transactions that might not be in the interest of the client. Indeed, many commission-based advisors are well-trained and well-intentioned. But the inherent potential conflict is great.
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.
Choosing an advisor with fiduciary responsibility who, by definition, implements prudent financial management practices, is like taking precautionary life saving measures while in the water. An advisor with fiduciary responsibility will minimize short and long-term financial risk and identify investment opportunities that will lead to increased value, while always placing the clients’ best interest ahead of their own. The following excerpt discusses what fiduciary responsibility means for the 21st century.
This vision of fiduciary responsibility carries new and redefined obligations for fiduciaries.
Fiduciaries should be knowledgeable about the social, environmental, political and cultural issues that affect their portfolios and which are analytic tools integrated with more conventional financial analysis. These issues include among others climate change, labor conditions and human rights worldwide, diversity on boards and in the workforce, and product safety.
Fiduciaries should use investment managers who have the skills and resources to implement an investment program that incorporates the interrelationships between financial decision-making and social and environmental issues, and who are also knowledgeable about these issues. This is not portfolio screening.
Fiduciaries should review their entire portfolios, not individual assets or even individual asset classes. Single decisions affect total portfolios that in turn have societal effects. For large institutional investors the bottom line is portfolio-wide. This requires awareness that negative economic externalities (e.g. pollution) and positive returns in a single company (e.g. pharmaceuticals) may benefit a particular firm they own, but will likely damage the asset value of other firms they own.6
Fiduciaries should develop proxy-voting guidelines, make them available to their beneficiaries, and disclose their actual votes on proxy resolutions. Fiduciaries are the stewards of capital entrusted to them to look out for all their beneficiary interests.
Fiduciaries should demand greater transparency and disclosure from the companies in their portfolios on social and environmental issues as well as issues of corporate governance. They will also need to encourage best practice, and better practice.
Fiduciaries should practice the same levels of transparency and disclosure they demand of companies on all aspects of their activities. Fiduciaries should explore the potential of alternative investments and alternative investment strategies to channel funds into new areas that are socially just and environmentally sound, as well as financially viable.
Fiduciaries should ask their lawyers how to accommodate these new responsibilities and obligations, rather than ask if they can. Even in situations where a legislature has directed that the highest financial rate of return is the sole purpose of a pension fund, such as the case of New York, this new analytical approach to financial decision-making need not be an obstacle. Substantial research shows that consideration of the risks and opportunities that social, environmental, political and cultural issues raise can improve financial performance, or at least have no negative effect.
This view of fiduciary responsibility and the obligations of fiduciaries is not a radical approach to institutional investing. In fact it is very conservative because it makes best use of all available information that can positively and negatively affect financial returns. The transparency of analysis and action that results should help address not only long-term societal impacts of investment decisions, but also immediate needs for greater disclosure from companies.
The transition from the present view of fiduciary responsibility to a new view may take some time. But the debate on these issues must begin now to the benefit all beneficiaries, shareholders and stakeholders alike.
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.
Navigating the waters of selecting a financial advisor can be difficult, but by choosing one who has fiduciary responsibility, you are choosing an advisor that has a legal responsibility to put your needs ahead of their own. There are a number of important differences that separate advisors who have fiduciary responsibility from those who don’t. The following article outlines those basic differences.
Very few investors know the critical importance of selecting an investment fiduciary as their financial advisor. That’s because the financial securities industry deliberately blurs the distinctions so lower quality sales representatives can sell you inferior investment and insurance products for big fees and commissions.
It is important to know there are two primary types of investment advisors and not one. Following is a brief description of each type so you know the differences.
Fiduciary advisors have the following characteristics:
They are Registered Investment Advisors or Investment Advisor Representatives
RIAs and IARs are held to the highest ethical standards in the industry
They frequently use job descriptions such as: Financial Advisor, Investment Advisor, Financial Consultant, Financial Planner, Money Manager
They provide financial advice and services for fees
They acknowledge they are fiduciaries when they provide investment advice and services
Fiduciaries are required to always put their clients’ financial interests first versus their own needs for revenue and income
Non-Fiduciary advisors (sales representatives) have the following characteristics:
They hold securities licenses, such as Series 6 and 7
There are held to much lower ethical standards than RIAs and IARs
Their job descriptions are sales representative, investment representative, financial consultant (noteoverlap with fiduciary advisors)
Their licenses limit them to selling investment products for commissions
They are not allowed to charge fees for their advice and services
They are not fiduciaries because they are not RIAs or IARs
The critical question you should be asking yourself is do you want a sales representative investing assets that will impact your standard of living during retirement and your financial security late in life? If your answer is no, and it should be, then you should limit your selection to fiduciary advisors.
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.
There are a number of questions that need to be answered in order to put together a long-term investment strategy that will align your risk tolerance with your portfolio. We invite you to watch this short video that discusses these questions.
You can schedule a complimentary portfolioreview with one of Paragon’s financial advisors if you have additional questions about aligning your portfolio with your risk tolerance.
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.
Your investment risk tolerance is the amount of stress you experience when your account declines. If you invest too aggressively for your risk tolerance, then at some level of decline you may reach a breaking point. When that point is hit, many investors feel the need to sell their investments in order to protect themselves. As a result, they make the classic mistake of selling out right at the market bottom just before the market rebounds. This causes them to lock in their losses and miss out on future gains.
We invite you to watch this video and then take a short 10-question survey to determine your risk tolerance.
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.
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