04 Aug Time to dump a longtime broker?

Q. My parents have their money in a brokerage account with a large brokerage house. I know they pay far more in expenses and fees than they would at a place like Schwab. They don’t even have great love for the broker, but they’ve been at the same place for like 40 years. How can I get them to switch, or should I just leave it alone?
— Not trying to be nosy

A. This is great timing to start this conversation with your parents.

Let’s first talk about a recent change that could impact your parents’ retirement accounts, such as IRAs and 401(k)s, and your accounts, too — the Fiduciary Rule.

The rule expands the definition of investment advice where retirement accounts or retirement planning advice is involved. In short, the rule elevates the standard of care to which brokers must now adhere, said Frani Feit, a certified financial planner with Tradition Capital Management in Summit.

Feit said prior to the enactment of this rule, brokers were only held to a “suitability” standard, which meant that as long as an investment met a client’s objective, it was appropriate.

“The `fiduciary standard’ is a much more stringent standard requiring an adviser to act in the best interest of his or her client, thereby putting the client’s needs first,” Feit said. “It sounds almost ridiculous that the Department of Labor would have to mandate proper adviser behavior; however their goal is to protect retirees from excessive fees and commission structures that eat away at savings.”

Now brokers will now have to fully disclose — through an agreement called a Best Interest Contract Exemption — if they want to continue receiving commissions or special bonuses for selling incentivized investments, Feit said, noting a 2015 report from the White House Council of Economic Advisers found that non-fiduciary type advice resulted in $17 billion of losses per year in retirement accounts.

This new rule doesn’t work the same for non-retirement accounts. These will still be managed on a suitability standard.

“Registered investment Advisers (RIA), like my firm, are bound to a fiduciary standard for every type of account we manage and all advice we give,” she said. “If a client wants to pay off the mortgage, and withdrawing the funds will not hurt the financial plan, we send the money. A broker may try and convince the client to leave the money invested since a withdrawal may lessen received fees.”

So with this in mind, it’s a great time to talk to your parents about how their accounts are being managed.

Bottom line, Feit said, working with an RIA who custodies accounts at Schwab or TD Ameritrade will give your parents peace of mind that they are receiving unbiased, transparent information in a fiduciary relationship.

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This post was first published in August 2017.