Who is your Financial Advisor, John Oliver?

Last night my wife and I were catching up on some TV after a week away and we came across an especially interesting segment from Last Week Tonight with John Oliver on HBO. It turns out I am not the only one with concerns about how large parts of the financial advice industry currently operate.  To view the segment in its entirety, please click on the link below:

While Mr. Oliver uses his sarcastic wit to skewer the industry and highlight many abuses, this is not a subject to merely chuckle about and dismiss. I founded my firm as an independent, fiduciary firm for many of the reasons that John highlights in his segment. It was great to see many of the values I hold and many of the reasons I decided to enter this business validated by none other than Mr. John Oliver himself.  We can all benefit from a good dose of sunlight on what must still be considered as a highly opaque industry. 

Mr. Oliver begins his piece with a common point of contention in the industry, namely that anyone can call him- or herself a Financial Advisor.  Given that this is the case, the term "financial advisor" has very little meaning in practice. If you are thinking of working with a "Financial Advisor" please check their credentials and make reference calls. At a minimum an advisor should have a Certified Financial Planner (CFP®) designation and ideally should have advanced credentials such as a Chartered Financial Analyst (CFA) or CPA designation or a JD or Master's Degree in Finance or Taxation from a reputable institution. 

One area that Mr. Oliver and I both find particularly troubling is the prevalence of non-fiduciary advisors in the industry.  All Registered Investment Advisors (RIAs), of which Ebersole Financial LLC is one, are registered with a State securities commission or with the SEC depending upon their size. RIAs are subject to a fiduciary duty which means they need to look out for a client's interests before their own and they must disclose conflicts of interest that may be likely to arise. Stockbrokers and financial advisors who work for large wirehouses (for example a JP Morgan, Morgan Stanley, UBS, or Merrill Lynch), insurance companies and broker-dealers, are subject to a less stringent standard - a suitability standard where they are not required to put your interests above their own. This is how they are able to sell a client a high cost mutual fund with a trailing commission paid to them or an annuity with a large up-front commission when there are lower cost alternatives out there that would help the consumer accomplish the same goal.  As a case in point, Mr. Oliver highlights annuities and I will leave you to review his comments on the fee levels.  A quick Google search on "annuities lawsuit" turns up 450,000 hits and reveals articles detailing huge fines paid by major insurers related to their annuity products and deceptive sales practices. Having an advisor who is a fiduciary will not resolve every possible conflict of interest, but it's a great place to start. 

This leads us to transparency and fees. There is a cost involved in working with an advisor. If you choose wisely and find someone who knows what she/he is doing, there can be tremendous value in having the relationship. To begin with, make sure all fees are disclosed up-front and don't agree to work with someone until they have answered your questions satisfactorily. Ask about the advisor's fee, how it is calculated and how (and by whom) they get paid. Ask about the operating expenses of the mutual funds they are recommending and if he/she receives any upfront commissions, trailing commissions or 12b-1 fees. As Mr. Oliver points out in the story about his 401(k) experience, there can be a myriad of maintenance/other fees that are added to the account that are for all intents and purposes hidden from the typical 401(k) plan participant. This is also the case with annuities where annual fees can run as high as 5% to 7% of contract value but are generally hidden deep in the bowels of the annuity contract. Mutual funds are another area where fees can differ dramatically between different classes of investors for the same product. Institutional clients get the lowest costs, generally, and retail investors tend to pay the highest cost. In this day and age no one should be paying an up-front load (commission) for a mutual fund. With most actively managed mutual funds failing to outperform their benchmarks over the medium and long term, there is little need to pay high costs to get appropriate exposure to the market. Index mutual funds and index ETFs, while not perfect, are a cheaper alternative to active funds, perform in-line with the benchmarks and are generally more tax-efficient than actively managed mutual funds.  Speak to your advisor to see if index funds and index ETFs may be the right choice for you. You may see equal or better performance and significantly reduce your fees paid at the same time. 

It is no wonder that the financial services industry is not interested in a stronger fiduciary standard as it makes their business more difficult. The industry generates a lot of revenue from providing investment products, services and advice to institutions and retail clients.  But, by asking good questions about fees, working with a qualified fiduciary advisor, sticking with low-cost investment options and maximizing your annual savings, consumers can take a step in the right direction toward securing their future. While it is hard to see the industry changing dramatically overnight, you can take these small steps beginning today. If we were all to demand greater transparency and hold people accountable, we might just get it.  You know that when Janice in accounting cares, you must have hit a nerve.  

(Ebersole Financial LLC does not endorse the opinions expressed by Last Week Tonight with John Oliver, Mr. Oliver nor HBO. Ebersole Financial LLC has no relationship to Mr. Oliver, HBO or Last Week Tonight, except for a standing date each Monday night with my wife to watch the latest episode on DVR. All opinions expressed by Mr. Ebersole are his own and do not constitute investment advice. Please consult your financial, tax and other advisors before making any investment decisions.)