The Ring Of Temptation

ppl2The financial media has been abuzz over the past few months concerning a proposal from the U.S. Department of Labor to require financial advisers to provide objective financial advice to retirement plans. This is known as the” fiduciary standard” and the requirement is long overdue. The DOL proposal follows a recommendation by the Securities and Exchange Commission staff in 2011 that sought to have all financial advisers be subject to the fiduciary standard. The SEC recommendation never gained sufficient traction, however, due to the all powerful lobbies from well heeled traditional financial services firms that prefer the status quo.

You see, the financial services system is really just a giant marketing machine, pushing expensive packaged investment products onto unsuspecting investors. Even experienced and savvy investors have trouble unraveling the byzantine structure of fees, commissions and other charges associated with these investments. To be blunt, this system was built to serve the legions of brokers and commission paid “advisors;” it was not built to serve the best interests of investors. Because brokers are compensated to push investments, many individuals “overvalue” investments and “undervalue” actual financial planning.

The visual below is a simple graphic representation of “The Ring of Temptation” which represents the traditional financial services firm sales system for investment products. At the top of the chart, with the largest “ring” are annuities, hedge funds and limited partnerships. The internal costs within these investments make it terribly difficult for the investor to win. Annuities deserve particular attention as they are sold to investors as a “safe haven”, when in reality they are so heavily laden with commissions, expenses and charges (sometimes called contingent deferred sales charges), that it is difficult for investors to generate reasonable returns. The primary reason annuities are sold to investors is for the very high sales commissions, plain and simple.
Temptation- how products are soldOf course, our firm has always operated under the fiduciary standard. We are compensated only by clients and not from sales commissions on investment products. We are very happy to see the financial services industry reformed in a way that benefits clients. Remember, just because a broker or insurance salesperson says they are a “financial adviser” does not mean that they acknowledge a fiduciary duty to you. The time for change has arrived. Ready for a real conversation?

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