The U.S. Department of Labor's fiduciary rule, which took effect June 9, requires financial professionals to put their clients' interests ahead of their own when providing advice.
Just FYI: The rule applies only to pre-tax retirement accounts, such as IRAs and 401(k) plans — not to taxable accounts, accounts funded with after-tax dollars, general investment advice, or information on a specific product or investment.
The National Association of Personal Financial Advisors is helping translate the fiduciary rule for the public. NAPFA put together a terrific list of tough questions to ask an adviser before you invest. It helps regular folks determine whether an adviser acts as a fiduciary, understand how the adviser is compensated, and ascertain what fees they may be paying.
In general, financial advisers are paid in three different ways: flat fees; commissions on trades and products; or a combination of the two. That's a key thing to understand, because if the advisers are paid strictly on commission, they may be incentivized to push unnecessary products. If they're disclosing those commissions, then we're all grown-ups and caveat emptor.
A fee-only adviser is paid a flat fee, compensation that can be based on an hourly rate, a percent of assets managed, or a retainer. (All NAPFA advisers are fee-only advisers and fiduciaries, so they have an interest in competitors' disclosing their fees. For more information, visit NAPFA.org.)
• Do you have a minimum fee? If so, what is it?
• What percentage of your firm's commissions comes from sales of insurance, annuities, mutual funds, stocks and bonds, and other assets? Does any member of the firm participate in, or receive compensation from, investments you may recommend to me?
• Do you receive referral fees from attorneys, accountants, insurance professionals, mortgage brokers, or others?
• Do you receive ongoing income from any funds that you recommend in the form of 12b-1 fees (marketing or distribution fees on mutual funds), trailing commissions, or other continuing payouts? Are there financial incentives for you to recommend certain financial products?
• Do you offer advice on goal setting, cash management and budgeting, tax planning, and regular investment reviews? Do you offer estate planning and education-funding ideas?
• Will you provide a comprehensive written analysis of my financial situation and recommendations?
• Does your financial-planning service include recommendations for specific investments or investment products? Do you offer continuous, ongoing advice regarding my financial affairs, including advice on non-investment financial issues?
• Will you take custody of, or have access to my assets? (The answer should generally be no. You should always have an independent third party sending you the investor copies of your statements, from the firm where your assets are held.)
• How long have you been a financial planner? Do you have clients and references willing to speak with me about your services?
• Have you ever been cited by a professional or regulatory governing body for disciplinary reasons?
• Are you currently engaged in any other business, either as a partner, officer, employee, trustee, agent, or otherwise?
• Will you or an associate of yours work with me?
• Will you sign a Fiduciary Oath?
• Do you have an agreement describing your compensation and the services that will be provided in advance? If you were to provide me ongoing investment-advisory services, do you require discretionary trading authority over my investment account?
Bond manager Sean Simko, head of fixed-income portfolio management with Oaks-based SEI and a Lancaster native, said the firm is staying away from Illinois and Connecticut municipal bonds, in favor of California, New York and Pennsylvania munis. It's also avoiding health care corporate bonds.
"There's a lot of uncertainty in health care as well, so if we're buying insurer bonds we're buying property and casualty instead of health care" corporate bonds, and in shorter maturities, Simko said.