Mutual Fund Investors Must Discover Their Advisor’s Conflicts-of-Interests

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    Conflicts-of-interest between financial advisors and their own clients remains a major problem in the financial services business since it costs investors billions and violates the fiduciary standard, according to author Chuck Epstein.

    “Conflicts-of-interest are common, especially in the mutual fund industry where fund companies pay investment professionals a fee, called revenue sharing, for recommending their own funds over a competitor’s,” Epstein said.

    He added that revenue sharing has been called “the primary source of conflicts-of-interest, which taints professional relationships between investment advisers and their clients.”  As defined by the SEC, revenue sharing occurs when the investment adviser to a fund makes payments to a broker-dealer for expenses it incurs when selling the adviser’s funds.  These payments are made to investment professionals, who sell funds to individuals and 401(k) plan participants. ethics

    But in practice, revenue sharing is paid to advisers or 401(k) plans administrators based on how much they sell and how long an investor owns the funds.  Since advisers receive revenue sharing payments regardless of fund performance, it can make it difficult for advisors who take revenue sharing payments to provide objective analysis, Epstein said.

    Epstein, the author of “How 401(k) Fees Destroy Wealth and What Investors Can Do To Protect Themselves.” cited that a 2010 Government Accountability Office report found that “if left unchecked, conflicts-of-interest could lead plan sponsors or participants to select investment options with higher fees or mediocre performance, which, while beneficial to the service provider, could amount to a significant reduction in retirement savings over a worker’s career.”

    Discover the Benefits of RIAs

    One way to minimize or eliminate the dangers of receiving investment advice tainted by conflicts-of-interest is by working with a Registered Investment Advisor (RIA).

    According to James Watkins III, JD, Certified Financial Planner®, AWMA® and owner of the blog, CommonSense InvestSense, “RIA firms are fiduciaries by law and, as such, are required by law to always put their clients’ interests first. What many investors do not realize and are not told is that many stockbrokers, insurance agents and other financial advisers are not held to a fiduciary standard, which allows them, some would argue requires them, to put their own financial interests ahead of their clients’ best interests,” Watkins said.

    James Watkins III
    James Watkins III

    “Investors need to become more proactive in protecting their financial security by and only working with RIA firms and educating themselves about the impact of investment fees. Chuck draws on his extensive experience and provides investors with valuable information to help them become more proactive and effective in managing their investments,” he added..

    Epstein, who spent over 25 years in the financial services industry, including holding senior marketing positions in the futures industry and at two major mutual fund firms, is the author of “How 401(k) Fees Destroy Wealth and What Investors Can Do To Protect Themselves.”

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    Chuck Epstein has managed marketing communications and public relations departments for major global financial institutions and participated in the launch of industry-changing financial products. He also has written by-lined articles for over 50 publications, five books and served as editor and publisher of nation’s first newsletter on the topic of using the PC for personal investing and trading. (“Investing Online, 1994-1999). He also is a marketing consultant, writer and speaker on topics related to investor protection and opportunities in the very dynamic cannabis industry. He has held senior-level marketing, PR and communications positions at the New York Futures Exchange, Chicago Mercantile Exchange, Lind-Waldock, Zacks Investment Research, Russell Investments and Principal Financial. He has won national awards from the Mutual Fund Education Alliance (MFEA) and his web site, www.mutualfundreform.com, was named best small blog in 2009 by the Society of American Business Editors and Writers (SABEW).

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