Kickback or Revenue Sharing?

Kickback: a percentage of income given to a person in a position of power or influence as payment for having made the income possible: usually considered improper or unethical.

Recently, I was reviewing a retirement plan for a potential business client and started digging into the costs of the plan. The plan administrator didn't know how much they were paying for the SIMPLE IRA so I called the mutual fund company to ask general questions about a retirement plan with them. What I found was another example of a sweet deal between brokers and mutual funds. 

One of the top 5 mutual fund companies by assets managed has a deal to pay brokers 1% annually for retirement plans with $1,000,000 or more. This is a subsidy to the business with the SIMPLE IRA because they don't have to pay commissions to the broker when buying the mutual fund. The client had no idea this is going on and maybe if they did they would question if the broker put them in the best fund company.

The next question to ask is where is that 1% subsidy coming from? It's coming from high commissions charged to investors with less than $1,000,000 and from higher than necessary mutual fund expenses. These types of "revenue sharing" agreements unjustly raises the costs for many investors, lowers client returns, and creates conflicts between the broker and the client. 

I have seen and heard how broker incentives and mutual fund companies entice brokers to sell products that benefit them and not always the client. A broker sells annuities to earn an 8% commission. A broker sells an exotic product, has no idea how it works but does know he receives an extra 2% commission along with the normal annual fee of 1% and doesn't have to tell the client. A broker has a short list of nine mutual fund companies she is allowed to sell primarily because of revenue sharing agreements. A broker who meets sales quotas receives free trips to Africa or Hawaii. 

It irritates me that brokers get away with receiving money from dual sources and are not required to disclose that information directly to the client. Instead, they bury their compensation in the fine print of thick prospectuses with legal jargon.

It is important to reiterate previous blog posts I have written. Please don't confuse or interchange financial advisor with a broker. Financial Advisors are held to a higher standard, a fiduciary standard, and can only receive compensation from fees paid by their clients. On the other hand, brokers are product salespeople who earn commissions and revenue from the companies they sell products for. The problem is brokers have found a way, through lobbying politicians and regulators, to take fees and commissions from clients and mutual fund companies. They don't have to disclose important information to their clients, don't have to work in the clients best interest and have conflicts of interest. I believe there is only one way to provide objective, independent advice that is in the clients best interest and that's as a fee-only, fiduciary financial advisor.

Value Added: Examples of Building and Protecting Wealth

How does a financial planner/advisor make and save you money?

Last year, Vanguard released a study showing that financial advisors can add about 3% in net returns annually. I have a great recent example of a client who is now going to save about $3,000 a year.

The client inherited a couple of annuity contracts from her parents. After digging deep to uncover all of the fees I tabulated their annual costs to be over $6,000 per year. Because I am an independent financial planner I can work with any number of companies that offer more appropriate investment products for my clients at lower costs. Although I do not place annuities in high regard it made the most sense for the client to exchange their existing contract for another annuity company that didn't charge a commission. By doing a 1035 exchange to a low-cost, flat fee annuity company the client will receive more service, be more diversified, use low-cost index funds with better historical performance and have their fees cut in half.

Asset location is another overlooked area to help save in taxes and increase returns. I have done many reviews for prospects where the other company had their money in all the wrong places. Investments that pay out a lot in interest, capital gains, and dividends were in taxable accounts.  But stock funds that were tax efficient were in IRAs. A better option would have been to own income investments in the IRA to protect it from being taxed at the highest income tax rate. It is important to combine all your assets, determine an appropriate asset allocation, and then place the pieces in the right account for the best tax treatment. Depending on your tax bracket, Vanguard figures the value added from an advisor providing proper Asset Location can be up to 0.75%.

These are just two examples of how an independent Certified Financial Planner, like myself, can help clients build and protect their wealth. There are complex matters that need to be considered from many different angles. Having an expert that is working in your best interest, is trustworthy and has the right skills, knowledge, and tools to do the job gives you a much better opportunity of accomplishing your goals.

Recap and 2015 Outlook

Hello & Happy 2015!

I am having a hard time finding a starting point for this recap of 2014 and outlook for 2015. My first thought is to write about financial planning and how all the pieces work together to build and support the other pieces. I am afraid that most people think that is boring and the only way to keep their attention is to talk about stock and bond returns in 2014. But that is not who I am. From the start of my company in 2008 I have always strived to provide advice and a perspective that is different from financial sales people. The focus of my business is to be a trusted financial professional who gives purpose to personal finances.

I can list a bunch of numbers and figures but what does it really mean to you and did we have control over it? The S&P 500 was up 11% in 2014. Great! Did we have any control over it? No. What we did control is whether or not we added money to our retirement account to take advantage of those gains and accomplish our long-term goals.

What if you had been consistently contributing $10,000 to your retirement accounts over the past 5 years? We rerun your Money Guide Pro financial plan and find that you can potentially retire two years earlier than you planned. Now that means something!

Most people thought bonds were going to crater in 2014 and the Federal Reserve would raise interest rates. Instead the U.S. aggregate bond fund (symbol: BND) was up +5.87% and has had positive returns in 6 out of the last 7 years. Did we control the bond market? No. Maybe we let fear overwhelm us and we kept too much money in a savings account that earned next to nothing. Or maybe, we controlled our fear and invested in stocks and bonds helping us earn a decent return.

Over the past 5 years, would you have rather earned 11% a year by investing in a balanced fund of 60% stocks and 40% bonds or 0.04% from a savings account? Would you have rather bought $10,000 worth of stuff you didn’t need or have earned an extra $7,000 to use towards a great family vacation? That has meaning and a purpose.

Having a financial plan and a budget is something else we control. They help us focus on what is important over the short-term and long-term. What we didn’t control was an Ebola outbreak, that the stock market would be a roller coaster, that oil prices would plummet at the end of the year, or that international stocks would be down -4.6% in 2014.

As we get started in 2015 I am refocusing my thoughts and actions on what I can control. Forget about the daily movements of the market, Wall Street forecasts and what the government is doing. Focus on what you spend, what you save, and what you invest.  How you control these three things will have a great impact on your life, your family, and your wealth.