Sean F. Flynn: From a dead rule comes conversation about financial advisers

The Department of Labor”™s Fiduciary Rule would have required commission-based financial advisers to act in the best interest of their clients when making recommendations on the investor”™s retirement assets, a requirement already in place for fee-based financial advisers. This rule sounds fairly straightforward, however, over the past couple of years there has been a lot of controversy. The Department of Labor Fiduciary Rule was originally set to be gradually instituted from April 2017 to January 2019. However, on June 21, 2018, the U.S. Fifth Circuit Court of Appeals essentially killed the rule. 

There has been confusion around the concept of getting financial advice in your best interest long before the Labor Department”™s rule was put into place. The fiduciary rule was supposed to, in theory, add clarity to the concept of fiduciary duties of investment professionals. Unfortunately it has just added more confusion. However, all the confusion around conflict-free advice has increased awareness for the consumer on what type of advice they are getting and why.

Even though the fiduciary rule was killed, at least for now, a lot of good came out of the process. The implementation of the rule and its subsequent reversal, was highly publicized on Wall Street as well as Main Street. This press brought the idea of fee transparency and conflict-free advice to the forefront of the financial advice world. Investors are becoming far more educated and empowered around the concept of fees, fiduciary standard and transparency, compared to five or 10 years ago.

Investors are asking their advisers more questions and doing more due diligence on individuals and firms. Investors want to understand how advisers get paid and how or what activity in an investor”™s account will generate income for the adviser, if any. For example, if there”™s an investment change in the investor”™s account they should not hesitate to ask why.  Investors should take more interest in what is happening in their portfolio. The more educated and empowered an investor becomes, the more in-depth and meaningful conversations they will have with their advisers. The more questions investors ask, the better informed they become, which creates a more transparent relationship. 

When speaking with financial advisers, investors should first request the qualifications of their financial advisers. Don”™t hesitate to research prospective advisers, their credentials and backgrounds with the Financial Industry Regulatory Authority”™s BrokerCheck, which documents complaints against advisers and advisers”™ experience. Ask financial advisers about their compensation, fees and mode of payment. Investors have the right to research and understand the investment plan being recommended. Individuals don”™t need to know everything about how they are investing, but they should be able to explain it at a high level. 

Investors should ask both their advisers/prospective advisers as well as themselves important questions. 

Questions for an adviser:

1. Are you a fiduciary, and if so what is your definition of a fiduciary?

2. What are my total fees, both implicit and explicit? An adviser could charge you a 1 percent fee on assets under management ”” this is an explicit fee. The underlying investments, such as mutual funds could be charging you an implicit fee. These fees are called expense ratios and do not show up on your statement. 

3. How do you get paid? Are you fee only or commission only, or a combination of both? Do you sell any commission-based products like annuities or variable life insurance?

4. What are your services and are they all included in my fee? For example, are you charging me just for investment advice or does that include financial planning as well?

5. What is your investment philosophy?

The questions investors should ask themselves:  

1. Do I feel comfortable working with this person?

2.If something was to happen to me, do I feel comfortable having this person offer financial advice to my significant other or loved ones? 

Investors should be asking these questions, but more importantly paying attention to how they are answered. An adviser who can give you a quick, clear and logical answer on how they get paid is a good start. If the answer is vague, unclear and not articulated well, that could be a red flag. An adviser should be able to explain clearly and concisely how they get paid, how they intend to invest your money and how they will service you as a client.  

Individuals should not feel like their adviser is doing them a favor by answering these questions. Most advisers welcome questions because it will add clarity to each other”™s role as well as lead to more in-depth conversations. All investors should have their questions answered thoroughly. They should have a good understanding of their advisers”™ answers and feel comfortable repeating the answers to a friend. The client adviser relationship should be thought of as a long-term mutual partnership based on trust and transparency, not a business transaction based on cost and return. 

Sean F. Flynn is a financial adviser and certified College Planning Specialist at Essex Financial, based out of the Southport office.  He resides in Fairfield with his family and is a graduate of Fairfield University. Flynn is a a member of The Fairfield Chamber of Commerce and The Friends of Fairfield Lacrosse. He can be reached at sflynn@essex.financial and 475- 888-9041.