What’s the Difference Between a Retirement Adviser and a Retirement Advisor?
posted by Fisher 401(k) October 2, 2017
(UPDATE: The DOL Fiduciary Rule has been vacated; references to the Rule no longer apply)
Do a quick Google search for a “retirement adviser” or “401(k) adviser” and you might find a small quirk in your search results: Sites for retirement advisors, spelled with an “o” instead of an “e.” The to-the-point individual might not think twice about it. But the strict grammarian might wonder, “Why the difference?”
Ken Fisher, founder of Fisher Investments, recently mentioned this very topic in a USA Today guest column. Ken writes:
“When I started in the investment business there were stock brokers, insurance reps, bankers and investment advisers. Many fine folks; and some scumbags, too. Forty-five years later I’m sure I underestimated the unscrupulous quotient.
. . . Once, only those regulated under the Investment Advisers Act of 1940 (IA1940) could call themselves “adviser.” Brokers started tilting those laws in 1999’s roaring bull market—usually calling themselves “advisor” with an “o” instead of “e.” Now everyone is some variant. Many use phrases like “fee-based” instead of “fee only” to charge a fee and double-dip you with commissions without you noticing.”
In other words, “advisers” have historically been held to a fiduciary standard, while “advisors” have not. That changed June 9, 2017, with the Department of Labor’s fiduciary rule becoming official, which requires that anyone who gives an investment recommendation must now legally do so in the client’s best interest (although the implementation date for that rule keeps changing—and there’s a chance the rule may be repealed).
Is There Still a Difference?
According to the Investment Advisers Act of 1940, an “investment adviser” is any person who:
- Runs a business advising others about purchasing or selling securities; or
- Analyzes or prepares reports about securities as part of a regular business
Today, federally regulated investment advisers still prefer the “e” spelling, because that is the spelling that IA1940 uses. But there are no rules stating who can use words like “adviser,” “advisor,” or “consultant.” The resulting inconsistency can be confusing, but what the adviser does is more important than what they call themselves. Beware the providers who call themselves “advisors” but are in fact brokers selling products—products that may benefit the broker more than they benefit you. According to Ken:
“Conversely, IA1940 advisers long labored under a strict fiduciary standard putting your interests first—which in simple English is what it sounds like—so they couldn’t mislead, selling you toxic junk you don’t need, with nosebleed level commissions, which basically just benefits them.”
Now, with the DOL’s fiduciary rule applicable, you’ll have to dig deeper to determine which advisors will be best for your business.
Here Are a Few Questions to Ask Your Advisor
- Ask how long your advisor has been a fiduciary for your 401(k) plan. They should be, under the DOL rule. But finding out whether they were already acting as a fiduciary before the DOL rule was applicable, or if this is a new role for them, could be telling: If your fees are increasing as a result of new fiduciary services, it may be time to shop for a new advisor.
- Ask whether your advisor receives compensation from any of the mutual funds currently available in your 401(k) plan. It’s common for advisors to receive commissions from selling certain mutual funds to their clients—this is often where conflicts of interest come from. If an advisor makes more money from selling one product over another, is the advisor addressing the possibility that they’re doing so to serve their own interests, rather than yours? Ask your advisor to remove variable compensation (which means they earn more in commissions for selling you certain investments over others) from their fee arrangements on your plan to help avoid conflicts.
- Ask whether they have any conflicts of interest. When all else fails, ask upfront what their conflicts are. Registered investment advisers are required to disclose their conflicts in Form ADV Part 2A. And if the advisor says they have no conflicts, make sure you get that in writing.
Whether your company’s 401(k) advisor prefers the “e” or the “o” spelling, what matters is the support they’ll provide your small business—and that they serve your employees’ best interests.