In 2009 E.J. Smith wrote:
In 2008 alone $108 billion flowed into the top three custodians for investment advisers while the big-four Wall Street brokerages had an outflow of $8 billion, according to The WSJ.
If you have a 401(k), I suggest you do what many others have already done and roll it over to an IRA the moment you are eligible to do so. And I advise you to seek out the help of an investment adviser.
Once in retirement, you don’t have time to make up for investment mistakes like you did when you were younger. You face difficult big picture investment decisions and unlike before indecision cannot be delayed.
When doing an IRA Rollover I want you to work with an investment adviser and not a broker. An investment advisor is held to a higher standard than a broker. An investment advisor is held to a fiduciary standard under the Investment Advisers Act of 1940. Brokers are held to a less strict suitability standard based on the Securities Exchange Act of 1934. It’s likely the average investor thinks an investment adviser and a broker are held to the same standard. Let me tell you, the difference between fiduciary and suitability is huge.
An investment adviser, such as Richard C. Young & Co., Ltd., is held to a fiduciary standard to act only in the best interest of clients and to avoid or disclose all direct and indirect conflicts of interest. A broker’s primary requirement is to have an “adequate and reasonable basis” upon which to recommend a transaction to a client and this transaction must be suitable to a client’s financial situation, needs and risk tolerance.
How are you able to tell the difference between fiduciary and suitability in the real world? It’s very difficult, especially if you’re not in the business, because brokers are increasing their fee-based accounts and acting like investment advisers. Brokers are using titles such as “investment adviser” or “wealth manager” and yet are still governed under the suitability requirement of The Securities Exchange Act of 1934.
Let’s say your broker, who works for a big Wall Street name, recommends his in-house mutual fund with higher fees instead of a similar lower cost fund. If you buy the fund with the higher fee, he’s covered under the “adequate and reasonable basis” and suitability standard. It’s not his fiduciary responsibility to recommend the low cost fund.
Richard C. Young & Co., Ltd., is an independent adviser and does not have a fee arrangement with our custodian. Even so, we do have an outstanding relationship with our custodian. A custodian is simply a company like Fidelity, Vanguard, or Charles Schwab that executes trades for clients and issues statements. Brokers often have a fee arrangement with their broker-dealer, who executes trades and issues statements for clients. I firmly believe having an outside custodian with no fee arrangement is the best option. And having an outside custodian has never been more important to your family’s peace of mind than it is right now. How sad it is that Bernard Madoff did not use an outside custodian. His firm executed the trades and issued the statements.
Once you’ve decided you want an independent investment adviser, you need to know that independent investment advisers are not all alike. Some investment advisers are dually registered as a broker-dealer and an insurance company, promoting high cost variable annuities. In this arrangement your adviser is supposed to disclose to you when he’s acting as your investment adviser, under the fiduciary standard, and when he’s acting as your broker, under the suitability standard. Imagine what that conversation must be like.
Investors may be shocked to learn that brokers and broker-dealers are held to a lesser suitability standard than the fiduciary standard for independent investment advisers. Evaluate your situation today and if you are not satisfied with the distinction that guides your manager’s investment decisions, then call me at 800.843.7273. Many investors have already figured out what I advise: sending $108 billion last year to the top three investment adviser custodians, while $8 billion flowed out of the big-four Wall Street brokerages.