According to recent games being played by RIAs, you can't always trust a Registered Investment Advisor to provide information with your best interests in mind. More RIAs are jumping on the commission bandwagon and offering some services as a fiduciary, while offering others under a broker-dealer in order to earn those enticing commissions. Here's how to protect yourself.

What is a Fiduciary?

If you aren’t familiar with the term, fiduciary, they are a person legally appointed and authorized to manage the assets for the benefit of another party, putting the other party’s interests and profits ahead of their own. This is the key phrase, "putting the other party's interests and profits ahead of their own." A fiduciary is legally bound to act in the best financial interest of the investor.

On the other hand, financial planners, wealth managers, and advisors who are not Registered Fiduciaries actually operate with the best interest of the broker in mind. They are obligated to push products for the broker-dealer they work for.

Are You Always Safe With a Fiduciary?

In the past one using a fiduciary for investment advice was the guarantee of safety. A fiduciary could be trusted. Now, the difference doesn't just lie in the title, Registered Investment Advisor vs. Financial Planner or Wealth Manager. There is yet another loophole in the system. While firing a financial advisor who clearly works on a commission and bonus based structure is a wonderful first step, it’s no longer the final to the problem. There is an ever increasing number of  fiduciaries playing games to get their fair share of financial product commissions. How can this be legal? Here’s the latest loophole some fiduciaries are using:

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Let's face it, a lack of transparency is what much of the financial industry runs on. Without it, clients would easily be able to read and understand the fees involved with their investments, they'd be able to clearly recognize the skewed marketing techniques that try to entice them with promises of financial security, and they'd be able to make deception free decisions. Sounds pretty reasonable, right? Well, don't expect it anytime soon. Why? Because this type of transparency would mean a complete overhaul for the financial services industry.

As it stands, most financial advisors are pushing products to earn commissions and bonuses, period. Many have very little investment or financial knowledge, and rely on their marketing and sales skills to earn their living. If you take a look at the advertisements for financial advisor positions, you'll see this is true. Many of the major investment companies looking to recruit salesmen advertise that, "No financial experience, knowledge, or background is necessary." What does that mean for the average investor? It means they are getting a good sales pitch, maybe even from someone who believes what they are saying to be true. After all, without any prior investment knowledge, it'd be pretty easy to train employees to believe they were working on behalf of the client. Sad but true.

Wall Street spends millions of lobbyist dollars every year to fight transparency in the financial services industry. Transparency in the industry would put an end to conflicts of interest, and crumble the commission and bonus structure of financial products. It would have to. Investment client's best interests would be placed first, the games in the industry would cease, and the companies that put their greed ahead of their client's need for competent financial advice would have to close their doors. None of this is likely to happen, so the responsibility for investment success lies with the investor. It's your nest egg, it's your financial future, and you need to be proactive about your results.

What can you do to stop the madness?

First, you should provide your current financial advisor with our full disclosure form. Print it out and present it to your advisor. It asks for a clearly stated breakdown of all fees charged to the investor, in writing. You can download a copy of our FULL DISCLOSURE form by clicking on the link. Very few financial advisors or investment firms are going to fill this out and sign it. If they won't, you're going to have to ask yourself why and decide whether you are going to stay with them or not.

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With investments, it's all about building the proper foundation. You can't, after all, apply the buy-and-hold strategy to investments wrapped up in high fee mutual funds or to a portfolio that is not broadly diversified. So, first things first.

But, once you have the foundation in place, after the allocation decision, the next determinant of investment outcomes lies in rebalancing. For many, rebalancing is just as difficult as sticking to a buy-and-hold strategy during periods of market volatility. That's why automatic rebalancing is the smartest option. Let's take a look at what rebalancing is, how it's done, and why it's important.

Rebalancing Explained

Rebalancing can be defined as the process of realigning the weightings of your portfolio of assets. The act of rebalancing involves periodically buying or selling assets in your portfolio with the purpose of maintaining your original desired level of asset allocation.

Let's say you've set your asset allocation target to be 50% stocks and 50% bonds, just to make this explanation easy. If your stocks begin to perform well, it could increase the stock weighting of your portfolio to 70%. When this occurs, the act of rebalancing will sell off your gains to "rebalance" or to bring your target allocation back to 50/50. Your individual asset allocation is what balances risk and reward, and is one of the most important decisions you, as an investor, can make.

How Do We Rebalance?

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If we allow ourselves to get sucked into the headlines and the news reports, it's easy enough to become caught up in Wall Street's mood swings. A portion of the hype that's presented is just a part of human nature, to report the sensational stories, and to explore the possibility of doom and gloom, but another part of the exploitation of every national event and its potential to directly affect the market, is, of course, Wall Street's way of making investors feel inadequate. That makes the need for financial advisors and wealth managers seem even greater. The more financial gurus are portrayed in a positive, sensible light, the more likely 'security-seeking investors' will flock to them for advice, direction, and investment decisions. Mass investment behavior, of course, is what drives the prices of stocks up or down, so if mutual fund companies and brokers are going to make their money, they need to be able to help drive investment behavior. The more activity the better.

Of course, none of this is in the best interest of the investor. By the time you've jumped on  or off an investment bandwagon, you've already missed the mark. By following behavior patterns and predictions, you'll fall into buying high and selling low, which is fine for the brokers, but bad news for an investor's portfolio.

Emotional Investing - The Number One Pitfall

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The Baby Boomer's. They are the most famous and largest generation to date in American history and they are quickly approaching retirement age. According to statistics by the U.S. Census Bureau, more than 10 thousand Baby Boomers will reach retirement age each day for the next 19 years.

Unfortunately, this very large niche of our population has now become a prime target for financial salespeople and fraudulent investment schemes.

According to Investor's Watchdog, it's become the perfect storm for investment scammers. The recipe for disaster includes:

• An ever growing population of seniors who are moving their current 401k accounts into self directed accounts and looking for advice.

• Baby boomers who have already experienced financial loss and are looking for that all important catch phrase, "financial safety" or "financial security." Some are so driven toward that false sense of comfort that they will believe almost anything that the wolf-in-sheep's-clothing financial salespeople are pushing.

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Good decisions are hostage to good information.

I would absolutely love to be able to report that the majority of all investors operate according to marketing information they carefully compile and weigh out. I'd also like to be able to report that most investors are wise to the false claims and advertisement hype that has taken over the financial field. I'd like to, but I can't.

Unfortunately, even the most prudent, level headed businessmen and professionals often fall short when it comes to investment decisions.

Here is a list of some of the most common myths and misinformation. If any of these sound familiar, we suggest you take a look at your investments, who you are dealing with, and conduct some investigations on your own.

Common Financial Myths & Misinformation You May Hear from Your Financial Advisor

Misinformation - Actively managed mutual funds are an excellent way to limit your downside risk. Your mutual fund manager will maximize your profit by adjusting your fund's holdings, and often will even beat the market.

Truth - Mutual funds are loaded with commissions, management fees, and overhead costs that will suck the profit right out of your portfolio, if there is any. Most of the time, only ones who enjoy the profits from mutual funds are those who market, sell, and manage them.

Misinformation - Financial advisors will offer their "professional" advice and financial opinions with your best interest in mind. That's their obligation.

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No, we don't think all financial advisors are purposefully trying to deceive their clients. Some of them are simply misinformed and following the guidance of their brokers or the mutual fund companies that pay their commissions. Here are the most common mutual fund statements you'll hear from an advisor who is pushing an actively managed fund package, along with the information you'll need to combat these claims.

The Myths & Misleading Information Surrounding Actively Managed Funds

Although passive management brings with it the benefits of low cost, market efficiency, and tax efficiency, a passive portfolio doesn't bring nearly the financial benefit to the mutual fund manager, (in bonuses and commissions) as an actively managed portfolio. For this reason, active management is presented with a shining array of benefits, most of which are myths.

Myth: "Mutual funds are managed by experts, so they will perform better than stocks."

Truth: Eugene Fama and Kenneth French released a paper in December of 2009 entitled Luck versus Skill in the Cross Section of Mutual Fund Returns. In the study, it was shown that mutual funds regularly under-perform benchmarks. Even when actively managed funds do outperform other funds, that fact is negated by the transaction and management fees wrapped up in the funds.

Myth: "Mutual funds with star ratings or past performance proof are a safe investment."

Truth: Past performance does not guarantee future returns. The disclaimer is clearly noted on the advertisement, but more often than not, it's ignored. Star ratings are based on information provided by the mutual fund companies, which are allowed to literally make poor performing funds "disappear" by either merging them into other funds or liquidating them. This convenient loophole is called "survivorship bias" and is completely allowable. These results are misleading at best, and are intended to create marketing hype to promote the latest, greatest investment.

Another problem with chasing after performance, even if the numbers weren't adjusted, is the fact that this tactic goes against the very foundational principles of investing. Buy low, sell high, --that's the way to make money. When you're chasing past performance, you're following the crowd and can easily end up doing just the opposite, --buying high and selling low. For more information on survivorship bias, take a look at: Understanding Survivorship Bias.

Myth: "Funds that beat their benchmark are excellent investment opportunities."

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Are mutual fund managers and financial advisors pushing for more actively managed portfolios? That depends on who you are talking to, but the wave of advice coming from advertisements and mainstream financial planning strategists certainly make things appear that way.

Using Uncertain Times to Boost Active Management Ideas

It's human nature to want to take action during uncertain times. That's just the way we are wired as humans. If you don't believe that, take a look at Dalbar's revealing study entitled, Quantitative Analysis of Investor Behavior, which was released in 2001. In this study it was concluded that when the average investor failed to achieve market index returns the most common reason was due to emotionally driven investment behavior.

Investors who consistently deviated from their original plan would compound their stress by second guessing decisions, pulling out of certain markets due to fear, and end up falling into a pattern of buying high and selling low. Of course, no rational investor would intentionally buy high and sell low, but when faced with the right set of circumstances, an unregulated investor is likely to make an entire string of decisions, each one affecting the previous.

Mutual fund managers and financial salespeople are aware of this common investment behavior, and re sounding the "uncertain times" alarm more than ever before. The market has always experienced ups and downs, and likewise, the economy has also weathered its share of hardships. Along with the uncertainty, markets have continued to perform over time, and investors with a well balanced, broadly diversified, and regularly rebalanced portfolio have continued to earn.

Inexperienced Investors are Targeted

Inexperienced or uneducated investors who are looking for a safe haven in these "uncertain times" are prime targets for actively managed portfolios. Why? An actively managed portfolio has the illusion of being more closely watched and more carefully attended to. Just think about the phrase, "actively managed," -- it seems to have the promise of being first priority. Mutual fund companies, who spend millions of dollars on advertising campaigns, are all too eager to solidify this thought process in the minds of investors.  Unfortunately, actively managed, doesn't have anything to do with more attention or better performance.

Pulling the Curtain on Actively Managed Funds

It's been over three decades since The Vanguard Group offered the first index-style mutual fund to investors. The strategy behind index funds is to simply match the performance of a broad market sector. This approach has proven to consistently beat actively managed funds, where "wealth managers" engage in stock picking and other risky behavior in an attempt to beat the market.

Even more troubling is the information found in a report conducted by Wharton finance professor, Robert Stambaugh. In the report, it was revealed that the cost attached to actively searching for hot stocks and bonds completely undermines their results.

"The average actively managed stock fund, for example, incurs annual expenses of about 1.3% or $1.30 for every $100 an investor has in the fund. At that rate, the manager has to outperform the market by 1.3% per year just to break even. If the market returned 8%, the fund would have to return 9.3%, a huge margin to achieve each year. Putting it another way, if the fund manager chose investments that returned 8%, his investors would only receive 6.7%."

For most years, only a small percentage of actively managed funds beat their benchmark indexes and managers who have successful returns one year, often fail the next. Stambaugh's report concluded that, "actively managed funds have provided investors with returns significantly below those on the passive benchmarks, on average."

John Bogle's Advice for "Uncertain Times"

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The move toward greater transparency and full fee disclosure in company 401(k) plans is long overdue. New 401(k) regulations issued by the Department of Labor require plan packagers to provide both employers and plan participants with a full breakdown of costs each quarter beginning in 2012.

What does this mean for you, the employer? The idea behind the disclosure of 401(k) fees is to recognize and cut any unnecessary or excessive costs. You, the employer, are the one responsible for this. The first step is going to be understanding the fees in the first place. A 2005 industry survey revealed that investment fees account for over 85% of the total fees in a 401(k) plan.

Understanding Investment Fees - How Many are There?

Investment fees are charges and expenses associated with the management of your plan's investment related services. They can be assessed as a percentage of the assets or as monthly costs. Investment fees, even when disclosed aren't always easy to make sense of. With the new DOL regulations which are trying to hold employers to a fiduciary standard which can place them at increasing risk for 401(k) lawsuits, it's vital to understand the breakdown of your 401(k) plan fees.

• Record Keeping Fees - These can cover a variety of activities, including enrollment of plan participants, processing fund selections, preparation of statements, and other activities.

• Consulting Fees - A broad topic which can include selection of vendors for investment options and other services.

• Trustee Services - May include the charge for holing your plan assets in a bank.

• Customer Service Fees - Simply calling in to the customer service line to resolve a problem can incur an assistance fee.

• Redemption Fees or Sales Charges - If you change investments within a given time period, these fees may be imposed by your provider.

• Surrender Charges - If you sell or withdraw money from an investment within a given number of years after investing.

• Wrap Fees - These fees can be added to the total assets in a plan participant's account or they can be assessed against specific investment options. Wrap fees typically include sales commissions, recordkeeping fees, and administrative expenses. Note: If you participate in a low fee investment option, such as an index fund, a wrap fee can be charged.

• Loan Origination Fee - If one of the participant's takes a loan from the plan, this fee is included, due to document preparation and loan processing expenses. From that point, annual loan charges are imposed for account maintenance.

• Front End Load - Some mutual funds use these fees. Since the front end load fee is charged up front, it reduces the amount of your initial investment. These fees can run as high as 5.75% of the initial investment.

• Back End Load, Deferred, or Redemption Fees - When you sell your fund shares, these charges are incurred.

This list includes the most common fees you'll need to look for and understand as the plan provider. Recognizing the fees is the first step. Fully understanding these costs and what is considered excessive, what can be cut, and what fees are unavoidable is the next. If you have questions about the fees your plan participants are paying, or whether you are vulnerable to 401(k) related lawsuits as the plan provider, please give our offices a call.

Also, grab your copy of the new book written by Bryan Binkholder, The Financial Coach and James Winkelmann, Registered Fiduciary and co-founder of Blue Ocean Portfolios: 401 (k) Conspiracy. It will be available on TheFinancialCoach.com website this November.

Unfortunately, yes you can. Business owners who are providing a 401(k) plan to reward and benefit their employees are at an ever increasing risk of lawsuits that could lead to heavy penalties or even the loss of their entire livelihood. Just perform a simple Google search for recent '401(k) lawsuits' and you'll come up with page after page of results. Some of the most highly publicized have been General Dynamics, Kraft Foods, and Caterpillar. Why are business owners coming under fire? Two words...fiduciary duty.

For years investment firms have continued to push financial products on largely uneducated clients who believed in and trusted their "expert advice." Unfortunately, many of these plans were (and still are) ridden with hidden and excess fees which end up siphoning a large portion of the plan participant's potential nest-egg from them, while lining the pockets of the brokerage firms. While all this has been taking place, have the financial planners who recommended the plans in the first place been held responsible? No, that would be too simple. Surprisingly, most financial planners are not considered fiduciaries and are not held to a fiduciary standard.

Fiduciary Duty Explained

In simplest terms, fiduciary duty is a legal term which binds a person to operate and make decisions which are in the best interest of another party. In the case of investments and retirement planning, a fiduciary is responsible to scrutinize investments and make sure they are set up in a way which will most benefit the client (or 401(k) plan participant). It goes without saying that financial advisors who are working with the finances of others should be held to a fiduciary standard, but they are not. Instead, these "professionals" who work in the financial industry every day and tout themselves as being the most educated on investment strategies and retirement planning are merely held to a 'suitability standard.' For more information on this topic, see this timely article, Understanding Misleading Financial Advisor Titles - Your Right to Know, by Bryan Binkholder, The Financial Coach.

Well, it goes without saying that the buck is going to have to stop somewhere. If the financial advisor who sold you the plan isn't held responsible or considered a fiduciary, who is? Someone is going to have to be the fall guy when things go wrong, plans fail, and participants come looking for answers.

So, who is being scrutinized and punished for the misdeeds of the brokerage houses? Certainly not the investment firms. Instead, the microscope is now being placed on the business owners who "allowed these excessive fees" to occur in the first place. It's like the burglar of a residence being proclaimed not guilty while the homeowner is charged for failure to install an alarm system. If this all sounds crazy, it certainly is, but since it is indeed happening, business owners need to protect themselves.

Protecting Yourself From 401(k) Related Lawsuits

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