Investors: How to Protect Yourself From Adviser Conflicts of Interest

Retirement planning is tough, and you need help you can trust. Here’s how to get it, with or without regulators’ help.

(Image credit: Aslan Alphan)

The Department of Labor’s much-debated fiduciary rule — which was scheduled to go into effect in April — had its opponents from Day One.

The rule, which emphasizes eliminating conflicts of interest among financial professionals, faced strong opposition from the start. Wall Street firms funneled money into lobbying to stall progress on the fiduciary rule. If this rule came to pass, traditional financial services firms working with qualified money would be forced to adopt new business models centered on the client’s best interests. Currently, some financial professionals are required to act under only a suitability standard, which means that the products they recommend must be suitable to the client’s goals and objectives given their current situation, not necessarily their best interest.

In early January, Rep. Joe Wilson (R-S.C.) introduced a bill that would delay the rule’s effective date by two years. While the bill has not been voted on, President Trump signed an executive order on Feb. 3 that effectively delays implementation for 180 days. A delay could give opponents time to water down the rule’s effectiveness, or even squash it completely.

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Which is too bad. Retirement planning is difficult enough without having to wonder if your financial professional is looking out for your best interests. The Department of Labor, which took six years to put the rule’s revisions in place, estimated that retirement plan participants are paying an extra $17 billion annually because of conflicts of interest, backdoor payments and hidden fees.

If the regulation is repealed, the rules governing who is required to act in a client’s best interest and who is held only to a suitability standard will stay the same unless addressed in the future. From my time working at a Wall Street firm, I witnessed the Wall Street business model, and it appeared some firms put their bottom line before their clients.

So it’s up to investors to look out for themselves — at least until they can be certain they’ve found a financial professional they can trust. It’s important for consumers to be informed about the DOL rule and compensation structures, regardless of the outcome.

With that in mind, here are some things to consider:

1. Brush up on your financial vocabulary.

Despite all the controversy over the DOL rule, most individuals still aren’t even aware there are different kinds of financial professionals.

For example, a Securities and Exchange Commission Registered Investment Adviser must follow the fiduciary standard (putting the client’s best interests first, avoiding conflicts of interest, and providing full and fair disclosure of all important facts), while a registered representative, also known as a broker, must only follow a suitability standard (finding products that are suitable for the client’s needs, but not necessarily the best, least expensive, or safest). Insurance-only financial professionals are also held to the suitability standard.

From conversations with my clients, it seems many individuals want a financial professional who is held to the fiduciary standard. And there are a couple of pretty easy ways to find one.

First, you can look at whether the adviser’s compensation is fee-based or commission-based. Many financial professionals held to a fiduciary standard choose to be compensated using a fee-based payment system. Others may choose to use a commission-based model. Starting here can help you narrow down your choices.

You also can go to to see whether a financial professional is registered as an Investment Adviser Representative vs. a Registered Representative or Broker. Click on “Search the Database” to access the Investment Adviser Public Disclosure website.

2. Be conscious of all fees associated with your investments.

In general, I advise avoiding load mutual funds, which can come with a sales charge or commission that is paid up front. Load mutual funds used to be the standard years ago, but more individuals have become aware of other compensation methods that may be better suited for them. If you are looking for ongoing advice from a financial professional, a fee-based arrangement is generally preferred. This model incentivizes ongoing service and planning, whereas these benefits may not be provided if an upfront commission has already been paid.

Be aware of the specific investments held within a fee-based account. You could be paying a fee for these specific investments on top of the fee to your financial professional. In this case, the firm could be getting paid twice. Consider an investor who pays an advisory fee to a financial professional who builds a portfolio consisting of mutual funds. That investor is paying fees for the total portfolio, as well as fees for each fund within that portfolio. Alternatively, a portfolio of individual stocks or bonds only has a fee on the total portfolio, not on the individual holdings.

3. Have you considered going with an independent firm?

The whole point of the DOL rule is to avoid conflicts of interest, and some firms may have those conflicts built into their corporate structure. I have seen firms use revenue-sharing deals and other incentives that appear to be putting their profits and shareholders ahead of their clients. For example, a large investment advisory firm may have deals with several mutual fund companies and providers of annuity products. Each time a client buys funds or annuities from one of its preferred partners, the firm receives a payment from the partner in return.

Many large financial companies have revenue-sharing documents disclosing their conflicts of interest. Most of these firms publish these documents buried deep within their websites, but an Internet search usually pulls them up with minimal effort. However, these legal documents can be very difficult to decipher, even for the savvy investor. Even if you don’t comprehend the legalese, it is important to simply know that these revenue-sharing agreements exist. These agreements can result in millions of dollars in payments per year, so make sure to look and see if a conflict of interest may exist.

And, finally, there are many advisers and firms out there who hold themselves out as being independent, but look closely. The company name may be Joe Smith Advisory Group, but in small print it will include the name of the big firm they work for. Essentially, they’re a franchise. These firms may have the same conflicts of interest as their larger counterparts.

If you’re diligent — and lucky — you’ll find a financial professional you can trust. Just don’t count on the government to lend a regulatory hand right away. Right now, the responsibility is all on the individual.

Kurt Fillmore is founder and president of Wealth Trac Financial, an independent financial services firm based in Bingham Farms, Michigan, specializing in customized wealth management and retirement planning. Kurt is an Investment Adviser Representative and licensed insurance professional.

Kim Franke-Folstad contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger was not compensated in any way.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Kurt Fillmore, Investment Adviser
Founder and President, Wealth Trac Financial

Kurt Fillmore is founder and president of Wealth Trac Financial, an independent financial services firm based in Bingham Farms, Michigan, specializing in customized wealth management and retirement planning. He is an Investment Adviser Representative and licensed insurance professional.