Presented by Mike Bonacorsi CFP®

If you meet with a financial professional, be sure to ask a critical question. If you make an appointment with a financial consultant on behalf of yourself, your family or your company, make the following inquiry before the meeting ends:

“Are you held to a suitability standard or a fiduciary standard?”

This distinction is very important. You should be aware of the difference.

What is a suitability standard? Investment brokers are frequently asked to abide by suitability standards: when they recommend a financial product to a client, they are ethically bound to recommend a product which is “suitable” for that client.

As laid out in the manual of FINRA (the Financial Industry Regulatory Authority, formerly known as the NASD or National Association of Securities Dealers), the suitability standard has long demanded that a broker make “reasonable efforts to obtain information” on four aspects of a client’s financial life:
• Financial status
• Tax status
• Investment objectives
• Other information used or considered to be reasonable
These factors (and others) have a hand in determining whether a financial product or securities transaction is deemed “suitable” for a client.1

Suitability standards emerged in response to an age-old Wall Street problem. Decades ago, stock brokers garnered all sorts of bad publicity for calling their clients up and recommending “hot” stocks or funds that were utterly inappropriate for them. The investors may have gotten burned, but the brokers got their sales commissions.

Suitability standards are good, make no mistake. The problem is that they could be even better.

Even with a suitability standard, a broker has no specified duty to act in a client’s best interest. So while that broker may recommend a “suitable” fund, stock or other financial product to you, he is not prohibited from recommending an investment that will result in a bigger commission for him or higher costs for you.

If a broker has a proprietary security that seems “suitable” for you, the broker may promote it ardently to you even though better-performing securities might be available.

In 2005, the SEC determined that “broker-dealers will not be deemed to be investment advisers” and therefore are not subject to the same fiduciary standards as Registered Investment Advisors (RIAs) when recommending investments to clients.2

In 2011, FINRA Rules 2090 and 2111 expanded the existing suitability obligations while creating new ones. Any recommendations of “investment strategies” and any recommendations to hold securities within an investment strategy must now be “suitable” for the particular client, and the investor profile compiled by the broker to judge suitability must consider additional factors.3

What is a fiduciary standard? This is the standard that Registered Investment Advisors must uphold. An RIA may be an individual or a financial firm. The “Registered” adjective refers to being registered with either the Securities & Exchange Commission (SEC) or a state securities agency.

RIAs have a fiduciary duty (a legal requirement) to act in the client’s best interest regardless of the level of compensation the advisor may receive as a result of recommendations or actions. Fundamentally, this comes down to two points as stated by the SEC:

• The advisor must avoid conflicts of interest.
• The advisor is prohibited from overreaching or taking unfair advantage of a client’s trust.

A Registered Investment Advisor is not supposed to pitch products, strategies or securities transactions with the idea that “this will be a win-win for both of us.” The client’s best interest comes first and it is the only interest that matters.4

Retirement plan sponsors must also meet fiduciary standards. If you sponsor a retirement plan for your workers, then you are by definition a fiduciary. So says the Department of Labor. If you violate fiduciary standards, you may be found personally liable and responsible for restoring any losses to the plan or profits from improper use of plan assets.5

If you have hired a third-party administrator (TPA) to help you with your plan, you need to understand whether or not that TPA will assume any share of fiduciary responsibilities. Most TPAs will not.6,7

How can you tell if a TPA will? Look at the contract you sign. Look for language (in the fine print) stating that the individual or firm recognizes that it will act as a fiduciary under ERISA and the Advisers Act when offering advice to plan participants. If the TPA exercises discretion and control over the retirement plan or some aspect of it, then it could be defined as a fiduciary.6

Seek strong standards. When you enter an advisory arrangement with a financial professional or financial consulting firm, the agreement you sign should tell you whether the advisor is held to a suitability standard or a fiduciary standard. In the opinion of many investors and financial professionals, a fiduciary standard clearly amounts to a higher standard.

Mike Bonacorsi CFP® may be reached at 603 769-3111 or mike.bonacorsi@lpl.com. www.mikebonacorsi.com

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=3638 [1/10/12]
2 – www.sec.gov/rules/final/34-51523.pdf [4/15/05]
3 – www.wnj.com/Publications/New-FINRA-Rules-on-Knowing-Your-Customer-and- [2/1/11]
4 – www.sec.gov/about/offices/oia/oia_investman/rplaze-042006.pdf [4/06]
5 – www.dol.gov/ebsa/publications/fiduciaryresponsibility.html [1/10/12]
6 – www.seethebenefits.com/showbenefit.aspx?Show=740 [1/10/12]
7 – montoyaregistry.com/Financial-Market.aspx?financial-market=why-choose-an-independent-financial-advisor&category=5 [1/10/12]

The difference between beginning your benefit at age 62 or your full retirement age (between 65 and 67 depending on the year you were born) could be as much as 25%. If you think you’ll collect more benefit by taking the lower amount for more years, run the numbers. The break-even point is between 78 and 82 years old, live longer and you will receive more lifetime benefit by taking the full benefit.

For those who will have less dependency on their Social Security benefit they can increase the amount they will receive event more by accumulating delayed retirement credits. By delaying your benefit these credits can continue to increase the amount received by 8% annually beginning at full retirement age up to age 70.

Married couples have options that will allow one spouse to receive a spousal benefit while taking advantage of the delay increases.

“Claim and suspend” requires both to be at full retirement age. One person signing up for benefits suspends receipt until a later time this suspended benefit will continue to accumulate delayed credits to age 70, meanwhile the spouse can receive a spousal benefit.

A spouse who has a benefit of their own based on their earnings can choose to receive a spousal benefit or their own, whichever is higher. One option they have is to choose the spousal benefit and allow their own to continue to grow. Once their own benefit reaches a point where it is higher than the spousal they can claim the higher amount.

Increasing your Social Security benefit not only helps current income, the increase might carry over to the surviving spouse. The surviving spouse has the option of continuing with their own benefit or receiving the benefit of the deceased.

Before considering any of these strategies review your current situation and discuss them with your financial advisor, accountant or attorney. Because the strategies are built around taking delayed benefit you need to have enough income to cover your needs while delaying your benefit.

This option, first available in 2006 would have expired in 2007 but was extended through to 2008 and 2009 then again through 2010 and 2011.

• It allows those 701/2 and older to donate up to $100,000 directly to a charity without having to claim the distribution as income.
* The donation can be used to offset required minimum distributions.
* Gifts can be made to as many charities as desired as long as the total does not exceed $100,000.
* A spouse can also give $100,000 from their IRA
* The gift cannot be given in exchange for a charitable gift annuity or charitable remainder trusts, pooled income or donor advised funds.

Because the gift is not treated and taxed as income there are no further tax deductions available on the gift however, the donation is not added to your adjusted gross income.

Keeping the distribution out of your adjusted gross income might result in a lower tax rate and the donation might help reduce your estate value for estate tax calculation.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your individual tax issues with a qualified tax advisor.

The problem comes with record keeping and reporting the basis. Unless the non-deductible contribution had been reported with your tax filing to the IRS, the distribution will be considered taxable. Most custodians do not keep track of these contributions so it is the responsibility of the taxpayer to maintain these records.

Upon distribution the amount will be made up of tax-free (return of basis) and taxable (deductible contributions, earnings and gains) until all basis has been distributed. Once the basis is depleted distributions will be fully taxable.
Not only does the potential for double taxation exist while you are alive but your beneficiaries will need to be aware of any “after tax” contributions to avoid the same double taxation issues.

It is important the beneficiary is aware of any basis in the inherited IRA. The assumption will probably be that all contributions are pre-tax and subject to taxation upon withdrawal. Documentation for non-deductible contributions should be included with other estate planning documents.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your individual tax issues with a qualified tax advisor.