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Staying Alive

Sigma Investment Counselors

March 6, 2015

Yahoo Finance penned an article last week titled, “Five ways your financial adviser can screw up your retirement, legally.”  This coincided with an announcement by US Labor Department Secretary Thomas Perez, indicating that he was sending the agencies’ “conflict of interest” rule to the Office of Management and Budget, which means that the timer is running for a possible implementation.  The rule relates to whether securities brokers should be subject to the fiduciary rules in the Employee Retirement Income Security Act.

For a quick primer, Registered Investment Advisors, like Sigma Investment Counselors, must act in a fiduciary capacity on a client’s behalf.  This means that all investments selected must be the “best” for that client.  In contrast, at present, securities brokers, such as those employed by Merrill Lynch, Morgan Stanley and TD Ameritrade, for example, only have to ensure that the securities selected are “suitable.”  For a more thorough explanation on this, please contact us.

The Yahoo Finance article cited these five circumstances which investors are urged to monitor. 

1)      401k-IRA Rollovers.  Sometimes, it may be beneficial for the client to keep their 401k’s intact at their former employer after they leave instead of rolling into an IRA.  Investment choices, fees and accessibility are all considerations.

2)      Load Fees.  Sales of some mutual funds carry steep loads, or sales commissions.  Is there a better, cheaper alternative?

3)      Opaque Fees.  These are fees that are not quite so obvious.  On many occasions we have met with potential clients who tell us that their advisors do not “charge them any fees.”  Really?  Are they working for free?  Typically, in these cases, there are hidden fees.

4)      Switching from passive funds to active funds.  This simply means selecting funds where an investment professional will periodically change the selections in a fund, versus selecting securities that are in an index and then leaving the portfolio alone.  In almost all cases, active funds carry higher expenses than index funds.  In addition, studies indicate that active funds frequently underperform passive index funds.

5)      Poor Performance.  Our take on this is that some portfolios get constructed with the Wall Street “fad of the day.”  Cooking up something that can carry higher fees is an objective of many financial product providers.  As was mentioned in our blog last week, many “alternative investments” fall into this category.  We have steered clear of these mostly poorly understood, high cost funds (with the exception of gold and real estate).

All comments and questions are welcomed.

Bob Bilkie, CFA®

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