We had a situation with somebody regarding a distribution from a retirement plan.  Given the fact that we’re fiduciaries, it caused us to behave in a certain fashion surrounding that.

Being a fiduciary… There’s a lot behind the word, but just to give you an example. There’s a rule. It’s called the Rule of 55. And if you’re a participant in a 401k, plan, cutting the bottom line, you can be excluded from the 10%, early withdrawal penalty if you’re taking money from as a distribution before age 59 and a half. Where that plays into how a firm acts as a fiduciary… this person would have had no idea if we said Roll 100% of your 401k to an IRA. Our compensation is based on a fee on the assets that we manage. Rolling everything over would equate to a higher management fee for us- full transparency. What we did was recommended to this person was to do a partial rollover to an IRA, leave a portion of it at the 401k because it’s going to save him money in penalties. He will not have to pay the IRS in the realm of, well over $10,000, over the next several years. What we did was we forgone a management fee on a portion of the portfolio to help this person, not pay taxes and penalties on the distributions. Being a fiduciary is you’re doing the right thing by your client, you’re putting your client’s interests ahead of your own, even when they don’t know that you are. 

When we started this firm in 2003, I had 25 years at brokerage firms. Brokerage firms operate under a different standard than a registered investment advisory firm. It’s the suitability standard versus the fiduciary standard. One of the things that we were focused on was wanting to take what we knew about investing and take that knowledge and apply it to a firm, that would be way more centered on the clients. And not just selling stuff. A brokerage firm is like a big store. What we are, is someone who helps you locate stuff in the store you want to buy. We’re kind of like a personal shopper. The personal shopper is doing it for a fee. Whereas, the store is selling inventory for a markup. It’s that simple. Different kinds of firms and businesses have different profit motives.  Brokerage firms… they just simply buy it at one price and sell it at another. It’s Caveat emptor… it’s the buyer has to know what they’re getting. 

In our case, we do the research. We’re not getting a commission on what you’re buying through us. You’re actually not even buying it from us. You’re buying it from our safekeeping firm, our custodial firm that we use. And we’re guiding you into it without a profit motive on what we buy, because we don’t get a markup on it. We’re hoping you’re going to buy something that’s going to go up in value. So our whole incentive, our profit motive is not to sell you something for a profit right away, but to profit over the long haul, from the management fees that we get from the relationship that if it grows. If the value of your account grows, our fee, our stream of income grows. This takes us out of the position of having to sell you stuff every month or every quarter and worry about how we’re going to get paid. Because we’re not worried about that. 

It’s a fee thing that takes forever to build a business like that. Because those kinds of relationships are very slow in developing. And once they come usually if you do a good job, they’re slow to leave. But this business is not built overnight. It takes time, effort. Patience.

This is why it’s so important to understand The firm that you’re with not just if you have a person that you deal with. It’s important to understand the firm that you’re with because there are some firms where you would get the advisor or the broker could get scolded or fired for, for not getting the full rollover of example. 

But because of the way our firm is set up we have to by law put the client’s interest ahead of our own interest. It’s not only encouraged us by Tom but it’s also expected that actions like that will take place that we will put the interest of our clients ahead always and look for ways to do this. But you can only do that if the firm encourages those types of actions. 

You might have a person that you talk to, but you have the firm that they’re with, understand the firm’s compensation model, understand their incentives, by being employed by that firm.  It’s so important, and we wanted to really shine a light on that. It’s easy to gloss over who’s behind the curtain. You must follow the money and know what the compensation structure is, know what the incentives are, and just understand how that incentive plays with your situation.

And there are a lot of brokers at major brokerage firms that now manage the assets based on a fee structure rather than a commission structure. And many of them are fiduciaries. So you don’t always just have to go to an RIA firm in order to have that type of relationship. But the overhead at those firms could be a lot higher. 

Tune into this full episode of the Tom Dupree Show to hear this and more.