Don’t be so quick to simply accept advice a financial adviser offers to keep retirement savings safe — that’s the takeaway from multiple red flags since the 2008-09 economic crisis.
First, there’s an important difference between advice that’s “suitable,” called the suitability standard, and what’s best for an adviser’s client, called the fiduciary standard. As reported in PBS’s “Frontline,” just 15 percent of financial advisers met the “what’s best for the client” standard as recently as 2013. The majority fit into the suitable category — the bare minimum in professional qualifications — which often translates into the sale of financial products.
This year, the President’s Council of Economic Advisers estimated that non-fiduciary advice costs Americans 1 percentage point of their return annually, which amounts to $17 billion each year.
“But that estimate is probably just the tip of the iceberg, because the consequences of non-optimal advice for retirement planning are hard to quantify,” says Casey B. Weade, a retirement-planning professional. “Let’s be clear: There is no silver bullet when it comes to retirement planning. Each individual and family requires a tailored plan based on their wealth, needs and goals. However, an adviser who is professionally required to meet your best interest, and not a minimal one, is a good place to start.”
Weade says the most important factor in the effort to keep retirement savings safe is having the involvement a third-party custodian, an entity independent of an individual’s financial planner.
“I’ve dealt with dozens of cases in which people had been scammed, and each one lacked a third-party custodian,” he says.
He reviews the role of these custodians, how they keep retirement savings safe, and the associated multiple benefits.
Third-party custodians
Bernie Madoff is arguably the most villainous name today in finances. He’s currently serving a 150-year sentence for scheming billions of dollars from his high-wealth clients in a Ponzi scheme. He was able to get away with it by acting as his own custodian, a financial institution that holds customers’ securities for safekeeping so as to minimize the risk of their theft or loss. Custodians tend to be large reputable firms because of the high volume of money they deal with. Always make sure that your financial adviser is not the same as your custodian.
Reduced opportunity
When you adviser uses a custodian, he or she will never directly touch your checks, deposits, or withdrawals. While your adviser can be given authority to make withdrawals, those withdrawals may be directed only to another account of yours or sent by check to your address of record. If withdrawals are directed elsewhere, they will require your signature, and the custodian is responsible if funds leave your account due to a forged signature.
Advanced technology for signature fraud
Custodians use advanced technology to detect signature fraud. The custodian will reject a signature and request verification if it fails authenticity checks performed by the custodian’s signature-matching technology. This detection process is very sophisticated and doesn’t rely on the quick glance of a human eye to determine if the signature presented doesn’t match previous signatures on file.
Insurance
Custodians carry large insurance policies: liability insurance to protect against errors and omissions in case unauthorized transactions occur, SIPC insurance for undirected transactions, and FDIC coverage for cash positions.
Duplicate statements
While your advisers may send you a summary of investments from time to time, you should receive a summary of your investments directly from the firm where your assets are held. Otherwise, unscrupulous and criminal advisers like Madoff may scheme by generating their own fraudulent statements and send them to you.
Casey B. Weade is president of Howard Bailey Financial Inc. in Indiana and author of the book “The Purpose-Based Retirement.” Weade, hosts Purpose-Based Retirement radio and TV shows in the Fort Wayne area. Weade graduated from Stetson University with a bachelor’s degree in Finance and as a member of the honorary finance fraternity Beta Alpha Psi. He earned the prestigious Certified Financial Planner certification in addition to being a Retirement Income Certified Professional. He is also an Investment Adviser Representative, as well as life, accident, and health insurance licensed and Long-Term Care Certified.
