“Everything has a price. It’s just what you’re willing to pay for it.” American author Anne Bishop said this once and I find that, as in many other areas of our lives, it’s very relevant to the financial industry too. You see, not only do we need to consider the price of the specific investments within our portfolio, but we must also contend with the cost of receiving advice from our financial professionals. The value a financial advisor brings to the table can be invaluable. A good advisor can bring years of experience to the table to help build a sound retirement system for your unique goals. They can help take the emotion out of investing and keep you on track, reassuring you that your plan is prepared to weather any financial storms in the forecast. Get this, numerous studies have shown that the value a financial advisor adds to a client’s portfolio is about 2-3% net return per year, depending on a client’s circumstances and investments₁.
Hmmm . . . but at what price?
As I tell my kids, nothing is for free. So there is no surprise that there is a price attached to working with an advisor. As a financial advisor who specializes in building retirement systems and one that operates his practice as a fiduciary, I continually strive to give my clients the greatest chance of success in retirement. But you know, not all advisors are the same. Not only do the services (and service levels) vary by advisor, but so does the scope and breadth of their services, as well as the level of expertise they offer. And at the end of the day, you need to select an advisor that you trust to help you reach your goals – and folks, you need to know the cost.
How much you are paying your advisor – and for what services – is a crucial component of choosing a financial advisor. Unfortunately, the industry has its fair share of confusion in this regard. When Jen and I meet with potential clients, they often can’t explain to us how much they truly paid their former broker or advisor. They may have gotten some explanation (or perhaps they didn’t), but often it was too confusing, vague, or difficult to attach a dollar value to it confidently. And frankly, if you don’t know how your financial professional is being compensated it’s difficult to understand their role in your system. For example, are they merely selling you something as a broker often does to earn a commission? Or are they actually providing objective advice that’s in your best interest? This is important folks!
For decades, the role of a financial professional and how they are compensated has been murky. However, in 2020 the Securities and Exchange Commission (SEC) passed a new regulation called “Regulation Best Interest” (“Reg BI”), part of which now requires broker/dealers and wirehouses to start providing investors with a document that explains how they’re paid and what services they provide. Referred to as a Customer Relationship Summary, (“CRS”), this form is supposed to explain in concise, plain English the difference between brokers and independent advisors and any conflicts of interest they have, including compensation.
Reg BI also requires that, when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer, a broker/dealer must act in the best interest of the retail customer at the time the recommendation is made, without placing its own financial or other interest ahead of the retail customer’s interest.
The problem? It appears that many firms haven’t taken this new regulation to heart and may be failing at the task. In fact, according to a new study from the Institute for the Fiduciary Standard₂, most firms are still omitting or even muddying this critical information. Of the 29 large broker/dealers examined in this study, almost none explained who they owe loyalty to (product issuers vs. clients) in their Form CRS.
“The disclosures we see right now are so terribly deficient,” said Knut Rostad, the institute’s president. “There should be no mystery whatsoever those investors don’t understand fees they’re paying, because they’re not told. There is no requirement that actual fees be disclosed.”
While these firms do all state, as required, that they are compensated for executing trades and selling securities, only 2 of them disclose that their “primary” service is executing trades and not providing investors with investment advice, the study found. Also missing from the disclosures is the fact that the firms are acting as agents for issuers and owe a duty of loyalty and care to these issuers.
As proof that confusion still abounds, the study found that 47% of investors believe the management costs of investments like mutual funds and ETFs are already included in the fee they pay their advisors or investment platform. And for those who are already working with an advisor or platform, this misinformation about fees and expenses reaches 60%₃.
Unfortunately, we’re continuing to see confusion today about what the individual investor is – or is not -paying for. It seems entirely reasonable that a broker or advisor should provide the investor with information to make an informed decision about whether to invest with a particular firm. But if you ask the question of a potential financial professional and are still unclear, don’t give up. In fact, I urge you to keep asking questions until you’re satisfied. If you can’t get the answers you need, walk away and find a true fiduciary, one who is required by law to not only put your interests first but also to be completely transparent about all costs and charges. After all, it’s your money – you deserve to understand what you’re paying for and what you’re getting in return.
So as always – be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield, MA. Insurance offered through its affiliate, CutterInsure, Inc. We do not offer tax or legal advice. Jeff can be reached at jeff@cutterfinancialgroup.com. This information is intended to provide general information. It is not intended to offer or deliver investment advice in any way. Information regarding investment services is provided solely to gain a better understanding of the subject of the article. Different types of investments involve varying degrees of risk, including the potential for loss. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable. Insurance product guarantees are backed by the financial strength and claims-paying ability of the issuing company. Market data and other cited or linked-to content is based on generally-available information and is believed to be reliable. Cutter Financial does not guarantee the performance of any investment or the accuracy of the information contained in this article. Cutter Financial will provide all prospective clients with a copy of Cutter Financial’s Form ADV 2A, Appendix 1, applicable Form ADV 2Bs and Form CRS as well as the firm privacy policy. Please contact us to request a free copy via .pdf or hardcopy. 1. https://tinyurl.com/6b5ejsm8 2. https://tinyurl.com/2art6sc 3. Ibid
