More and more individual investors finding an independent, third-party investment adviser to help improve their long-term company 401(k) investment management decisions.
How do you go about finding the right advisor? Ask any investment adviser you talk to these two questions. And then listen carefully to his or her response.
1. Are you acting as a fiduciary regarding the mutual fund recommendations you will make to me on my company 401(k) retirement plan menu?
This is far and away the most important question to ask any advisor. The answer will confirm your will receive investment advice in your best interest. Or you will receive investment advice that is conflicted.
Go on google and look up the word fiduciary. It is a very scary legal responsibility. Any investment advisor willing to take on this fiduciary liability is a good place to begin your search.
A Registered Investment Advisory (RIA) is required to act as a fiduciary and provide advice that is in their clients’ best interest. RIA’s are personally liable for the investment advice they provide their clients inside or outside of a company 401(k) retirement plan account.
Investment advisors who work for banks, brokerage firms, insurance companies and company 401(k) retirement plan providers fall into a much different category. These advisors are only required to provide advice that is suitable. And saleable.
2. How will I pay you for my company 401(k) investment advice?
Registered Investment Advisors acting as fiduciaries can only accept investment advisory fees paid by clients. Investment advisors working for your company 401(k) retirement plan provider receive payments from the mutual fund companies found on your company 401(k) retirement plan menu.
Payments made from company 401(k) mutual funds are called soft dollars. Soft dollars are also paid to your company 401(k) retirement plan provider or the investment advisor who sold the 401(k) plan to your company.
Company 401(k) advisors who are paid soft dollar payments from mutual fund companies have an obvious agenda. These investment advisors are conflicted. They are sales people and not fiduciary advisors. That is why they bury their annual mutual fund soft dollar amounts in an indecipherable mutual fund prospectus.
Investment advisory fees to a Registered Investment Advisor are hard dollars because you get an invoice for them and understand how the dollar amount is calculated. There is no conflict of interest or hidden costs.
The optimal investment management strategy for any individual company 401(k) retirement plan participant is to own the lowest-cost and best-performing mutual funds available. The most efficient way to accomplish that goal is with the help of an independent Registered Investment Advisor.
Most other resources to help you pick 401(k) mutual funds are conflicted.
Ric Lager
Lager & Company, Inc.
