This has already been the case for registered

Info icon This preview shows pages 38–39. Sign up to view the full content.

This has already been the case for Registered Investment Advisors (RIA) , who must be registered with either the Securities and Exchange Commission (SEC) or the relevant state security regulator if they do not have a large enough pool of assets that they are managing. An RIA will work through an asset custodian (like TD Ameritrade or Charles Schwab) as opposed to a broker (like Merrill Lynch or Morgan Stanley). I am not suggesting that one is better, but RIAs typically are paid on a fee-only basis while those who work with a broker are typically paid through commissions. This is the true heart of the issue...commission-based investment advice. Does a financial professional recommend a specific investment and then get paid a commission? If the answer is yes, then there is the potential that the recommendation is in the best interest of the financial professional and not the customer. The New Fiduciary Rule levels the playing field by forcing all financial professionals to make recommendations that are solely in the best interest of the customer. This does not mean that commissions cannot be paid. It does mean that documentation must exist to prove that the customer's best interest drove the recommendation and that the commission paid was reasonable given the other alternative investment options. Essentially, this is about increased transparency for financial consumers. With respect to a mutual fund, Class A (Links to an external site.)Links to an external site. shares charge a hefty fee to the purchaser. This fee is typically 3.5%! This can set a big hurdle for performance. If you invested $100,000 in Class A shares of a mutual fund, then you would pay $3,500 up front for the privilege of buying these shares. In the wake of the New Fiduciary Rule, a new share class has been born. Class T shares (Links to an external site.)Links to an external site. also charge a fee up front, but they only charge 2.5% as an up-front fee. Both Class A shares and Class T shares might hold the same underlying exposure...just different fees. There is one share class that is even better. This is the Investor class shares. These shares have no load (no upfront or back-end fee). Why wouldn't everyone just buy the lowest fee option? The answer is that most people don't know they exist and/or their 401(k) does not provide them as an alternative choice. Many Vanguard offerings are a very low fee. People that sell funds with a load (sales commission) or who sell insurance-based products with a commission (like an annuity or whole life insurance) will potentially need to change their practices if the New Fiduciary Rule sticks. There is an ongoing debate on whether it is better to pay up-front commissions or annual management fees. Commission-based financial professionals make their money by selling financial products that pay them commissions. They must either find new customers on a regular basis or churn their existing client base to harvest a new round of fees. If a client is sold Class A shares in year 1 and
Image of page 38

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Image of page 39
This is the end of the preview. Sign up to access the rest of the document.
  • Spring '14
  • VOSS,JAMESA
  • Cash balance plan, HCES

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern