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ArticleHow Altfest Serves You Better By Being A Fiduciary

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As you may know, Altfest is a fee-only advisory firm. We do not accept commissions or gifts from the funds we invest in. We only choose what we believe is best for each client on an individualized basis.

You may have heard recently about proposed changes in the way financial services are being regulated under a proposed rule known as the Department of Labor Fiduciary Rule. To understand why the government proposed new rules it helps to know that not all advisors are compensated the same way and not all advisors are legally obligated to do what is best for you.

Compensation of Financial Advisors

Before 1982, many financial advisors got paid on commission, which meant they got paid for every action they took on your behalf. Whenever the advisor bought or sold a product, the advisor got paid by the provider.

Some advisors felt that being commissioned-based was not objective. They wanted to focus on planning and to make decisions about financial instruments that did not include payment to the advisor from the transaction. This group of advisors, including Lew Altfest, created a fee-only model. Fee-only advisors do not accept compensation based on the product sales, and instead often charge fees based on total assets managed.

Since Altfest is a fee-only firm, our risk is aligned with yours. If an investment falls short, there is a loss both for you and for us. Additionally, due to the way we are structured as a fee-only Registered Investment Advisor (RIA), Altfest is required by law to always act in your best interests, which is not true for most other financial advisors. AARP, The Wall Street Journal and CNBC all have recommended using fee-only advisors.

The success of fee-only advisory services caused fear among some managers who did not practice this way, so for that and other reasons they created a new term to explain their business model, the “fee-based” model. In contrast with fee-only, fee-based is a combination of commissions from sales plus additional revenue from assets under management. Some say this name was created to cause confusion in the marketplace. As Geof Brown the President of NAPFA told the Chicago Tribune “Fee-based is tossed around a lot in the industry to disguise the fact that someone is compensated by commission and fees,”1 If a non-fee-only investment manager decides that you need a mutual fund made up of small-cap funds, they can choose one that will pay them a high commission, and may also get additional compensation if the fund does well. The advisor would earn less if the fund does not do well, but they would still have made money from getting you into the fund.

Ethics of a Financial Advisor

Financial advisors are legally and ethically governed by two different sets of standards: suitability or fiduciary. Managers who follow the suitability standard must choose investments that are “appropriate” in terms of an investor’s personal circumstances and willingness to take on certain levels of risk.2 The advisor must have a reasonable and rational belief that an investment generally meets the investor’s objectives and needs. All fee-based and commission-only financial advisors are governed by the suitability standard.

Altfest is governed by a higher standard of care: that of a fiduciary. A fiduciary must put the interest of their client over their own and do what is best for their client. The fiduciary standard has two parts, a duty of loyalty and a duty of care. This higher standard requires Altfest to:

1. Report any possible conflicts of interest to their clients.
2. Strive for the best combination of low costs and quality of investment vehicles.
3. Altfest employees cannot buy a security before we buy it for you to avoid raising the price for you or benefiting from our advice to you. If Altfest recommends the buying of a mid-cap mutual fund, Altfest does not take a commission from that mutual fund in any way.  Financial Planning decisions are also custom tailored to fit both your needs and your interests. Altfest applies our fiduciary obligation to both our investment management and our financial planning advice.

Altfest has, from its founding in 1983, always been fee-only and a fiduciary. Altfest does diligent research in an effort to ensure every investment choice for each client is correct for that client in terms of cost, risk and prospects for future performance. Lew Altfest was a founding member of the National Association of Personal Financial Advisors (NAPFA), an association that requires members to be fee-only and always put their clients’ interest above their own.

Altfest prides itself on being early to promote the idea that the interest of the client and the firm should be aligned. We can remain dispassionate about the advice we give and stay passionate about helping our clients. Then we all win.

 


1Chicago Tribune, “Fee-only financial advisers are different from fee-based” by Anya Kamenetz, May 12, 2015;  2Investopedia.com


 

The foregoing content reflects the opinions of Altfest Personal Wealth Management and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

Past performance is not a guarantee of future results. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.

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