Financial guidance without conflicts of interest

The Chicago Tribune has an excellent article on the different standards of care investors can expect from their financial advisors. You can read the article here.

Will You Be My Fiduciary

Seldom have I read a blog post that I wish I could share with the entire world, but Tara Siegel Bernard, writing on 'Bucks' over at the New York Times just laid one down that I have to share with you. Her post titled 'Will You Be My Fiduciary' and the article that she wrote to go along with it deserve your attention. Tara posts a simple fiduciary pledge that you can at least use to start an important conversation with your advisor. While many wont sign it and some have legitimate reasons for not signing, it gives you a chance to learn why and have a hard conversation about what is in your best interests. I've posted the pledge below, but please read Tara's entire post here.

The Fiduciary Pledge

I, the undersigned, pledge to exercise my best efforts to always act in good faith and in the best interests of my client, _______, and will act as a fiduciary. I will provide written disclosure, in advance, of any conflicts of interest, which could reasonably compromise the impartiality of my advice. Moreover, in advance, I will disclose any and all fees I will receive as a result of this transaction and I will disclose any and all fees I pay to others for referring this client transaction to me. This pledge covers all services provided.

X________________________________

Date______________________________

Bye-bye, Dinosaurs

Okay, I am biased on this subject, but here is an article about the future of the financial services business that I cannot help but share. The author, Bob Veres, has been at the forefront of the movement to provide fiduciary care for investors. His most recent article in Financial Planning Magazine makes some observations I can't make about my competitors.

It was almost seven years ago that I predicted the demise of the big brokerage organizations, so the shotgun acquisition of Bear Stearns, the bankruptcy filing of Lehman Brothers, the sale of Merrill Lynch and the reformulation of Morgan Stanley and Goldman Sachs as banks simply confirmed a trend that started long before Prudential Securities was sold to Wachovia or Shearson or when Kidder-Peabody and Drexel Burnham Lambert went the way of all flesh.

My reasoning at the time still holds. What was the purpose of these large institutions in our modern financial marketplace? We have independent RIA firms offering increasingly unconflicted financial advice. We have more than enough mutual funds to fill the void left by the wirehouses' high-expense, low-performance asset management divisions. I'm even having trouble seeing why the capital markets need somebody to underwrite the shares of new public companies, at a collusive cost of 7.5% of every dollar raised. Haven't we successfully tested Internet-based IPO auctions, which produce better pricing at a small fraction of the cost?

Bob goes on to lament the loss of some of the things these mega firms provided.

We'll also miss the advertising. The brokerage firms allocated a generous portion of their profits to marketing campaigns that communicated a powerful ideal of what financial planning and financial services should be. With extraordinary creativity, they built consumer demand for that wise counselor who could help you finance your daughter's dream wedding and your once-in-a-lifetime vacation around the world. Who among us is going to dig into his or her pockets to pay to air that message during the next Super Bowl?

I hope you will take the time to read the article in its entirety and share it with your friends.

401k Q & A

Through my membership in NAPFA, I received a press request from a reporter with MSN. The questions he posed were so good I though it would make a good blog post.

How can a person tell if their employer sponsored defined benefit plan is good?
Wow, a very subjective question. It is hard to make generalizations but the first place to look is the fees charged to participants. Many 401k providers "wrap" administrative and reporting fees into an "asset fee" or "annual maintenance charge" that are billed against the individual participants investments. While this is legal, a "best practice" is for the plan sponsor to pay these fees directly on behalf of the plan. It is a deductible item for the sponsor and allows better returns for the participants by lowering the expenses charged to their tax deferred account. Another area to examine is the total fees paid by participants, which include "asset fees" and the expenses of the investments a participant chooses to use in their account.

If not what can they do to remedy the situation?
Many employers are not aware of their options. The employer has made a financial commitment to their employees by offering the 401k, and they are almost always participants themselves. I am sure they want to offer the best plan they can. A good resource for plan sponsors is www.dol.gov/ebsa/fiduciaryeducation.html. Here sponsors can download booklets and forms to help them evaluate different 401k proposals.

Can you have a Traditional IRA if you have a 401k or 403b plan at work?
Yes, if you meet certain income limits. For single filers with modified adjusted gross income of $52,000 and under for joint filers with income of $83,000 and under if you participate, or income of $156,000 and under if your spouse is the participant, you can make fully deductible contributions. For single filers with MAGI between $52,000 and $62,000 and joint filers with MAGI between $83,000 and $103,000 if you are the participant and between $156,000 and $166,000 if your spouse is the participant you can make partially deductible contributions. Another option is a Roth IRA contribution which you can use if you would qualify for a fully or partially deductible Traditional IRA contribution.