Retirement Changes Ahead
by Samuel J. Flaherty

It is important to point out that a competent and trustworthy Financial Advisor gives advice based on the best interest of his/her client regardless as to how he or she is compensated. That has always been true.

With many different names for the costs specific to Financial Advisors it can be confusing. For the purposes of explaining these ideas, and since Fees, Loads, Front End Sales Charges, 12b1 Fees, and Commissions can all be accurately called costs, I will substitute the term “costs” as a replacement when appropriate.

Department of Labor (DOL) Ruling – The recent ruling is intended to align the advice given by Financial Advisors with the best interests of their clients. The method chosen by the DOL was to hold Financial Advisors to a “Fiduciary Standard” on retirement accounts, effective April 10, 2017. As a Fiduciary, a Financial Advisor is required to give advice based on “the best interest” of the Investor. This differs from the prior standard of “appropriate” for the investor.

Let’s say that it is appropriate for Ms. Investor to purchase $100,000 of a “Growth Mutual Fund” investment and she is getting advice from her adviser to help her decide between Growth Fund A and Growth Fund B.

Assume Growth Fund A, which has underperformed the benchmark, costs the investor twice as much in comparison to Growth Fund B, which has outperformed the benchmark.

In this example her Advisor could recommend either investment and meet the “Appropriate” standard as both Mutual Funds are “Growth” Investments thus considered appropriate. However, only the Growth Mutual Fund B investment meets the DOL “Fiduciary” standard since it has lower cost and better performance.

Fee Based vs Brokerage Based Advisors
While the Fiduciary Standard does appear to provide the investor with added assurances regarding the investor’s best interest, it does not eliminate conflicts of interest. For that reason it is important for you to understand what type of investor may benefit from ‘Fee Based’ versus ‘Brokerage Based’ investment advice so that you may choose what is best for you.

FEE BASED—An investor who desires active management of their investments (large volume of buys and sells) may derive value from a Fee Based account. Fee Based advice, in general, is charged as a percentage of the total account value to include all stocks, bonds, and mutual funds held in the account. This cost applies to all investments in a fee based account regardless of how many buy or sell transactions occur.

Potential benefits may include:
¦ An investor may feel more confident when advised to buy or sell since the Advisor has no financial incentive for executing additional transactions.

¦ Many Fee Based accounts allow the Advisor discretion to make buy and sell transactions without prior approval from the investor. For investors who desire active management of investments but are not interested or available to approve every transaction, the Advisor can execute transactions without investor approval.

BROKERAGE BASED—An investor who uses a long term buy and hold strategy may benefit from a Brokerage account. Brokerage Based advice, in general, has a cost at the time an investment is purchased, and in some cases, at the time of sale also. These costs only apply to the specific investment being bought or sold. Think of it as only paying for the advice you act on.

Potential benefits may include:
¦ The lower overall cost of Brokerage advice since the cost only applies to the specific investment being bought or sold with no costs incurred on other investments in the account.

¦ Brokerage accounts often require the investor to approve buy and sell transactions prior to execution. For investors who want more control over costs, or want the benefit of a transaction explained in advance, a Brokerage account may offer just that.

Ways you might reduce your costs when using A-Share mutual funds
Using a long term buy and hold strategy with A-Share mutual funds in a Brokerage relationship may be a good way to invest for many in retirement or many preparing for retirement. If this sounds like you, consider this potential strategy for reducing costs.

For example, let’s say the highest up-front cost on a hypothetical A-Share mutual fund is 5.5%. But if you invest $100,000 the up-front cost is discounted to 3.5%, at $250,000 it goes down to 2.5%, $500,000 it’s 1.5% and if you have $1,000,000 to invest there is no upfront cost, 0%. You might qualify for these discounts (aka breakpoints) by linking all your accounts together. And potentially, if you’re married, or have dependent children with investment accounts, you may combine all these family members and all their accounts to qualify for the discounts (breakpoints).

Hypothetically, Mr. and Mrs. Jones have $800,000 in IRAs, a joint account worth $150,000, and their 16 year old daughter has $50,000 invested for college. If they invest all the money with one mutual fund company no up-front costs will be charged.

Many mutual fund companies offer a variety of funds with different objectives such as Growth Funds, Growth and Income Funds, International Funds, Value Funds, Bond Funds, etc. For investment flexibility and rebalancing, you can typically exchange from any fund to any other fund at the same fund company without any costs. It’s called a mutual fund exchange.

Discuss these ideas with your Financial Advisor. A-Share mutual Funds typically have an annual 12B1 fee, for example .25%, as part of the ongoing cost. The 12B1 fee is intended to allow the fund company to compensate the Financial Advisor for providing ongoing service of your investment. Consider any other costs which might apply.

Mutual Fund expenses vary. Investing in mutual funds involves risk, including possible loss of principal. No strategy assures success or protects against loss. All examples are hypothetical and are not intended to provide specific advice for any individual.

Samuel Flaherty is a financial consultant with, and securities and advisory services offered through, LPL Financial, a registered investment advisor, Member FINRA/SIPC.

Samuel J. Flaherty
CFP©, ChFC Certified Financial Planner™
Flaherty Financial Services, LLC
644 East Broad Street
Souderton, Pa. 18964
(215) 723-2000

Published (and copyrighted) in Suburban Life Magazine, January, 2017.