When is Independent Not Independent?

By Mark Folgmann

The financial service industry loves to use the word independent. Almost every advisor uses the word in all their advertising. Let’s take a closer look at what this means and why it’s so important. Webster dictionary’s definition of Independence is “Not contingent on something else for existence, operation, etc or not influence by others in opinion.” Virtually every advisor that will use the term Independent will have small print at the bottom of the advertisement that states whom they really represent and normally this is a broker-dealer or insurance company. This broker-dealer decides what products they can offer, process all their business and writes their paychecks. Without a broker-dealer the advisor can not operate. Typically these advisors want you to believe they sit on your side of the table and always act in your best interest but in reality they owe no Fiduciary Standard to you their loyalty and responsibility is to their mother-ship and their only duty to you the client is known as the Suitability Standard. In the simplest terms this means that they have done you no harm but have not necessarily done the best job possible because they are constrained by what they can do through their broker-dealer. Therefore it is my argument that they are not Independent at all because their existence relies on someone else for existence and operation.

Why is a word so important? This lack of Independence also creates many conflicts of interest driven once again by the mother-ship. They set compensation based on the negotiation completed by the broker-dealer and the product companies. Normally they have different compensation for like products which are structure to increase sales. There are also trips and conferences that are structured to drive sales and these also can create multiple conflicts of interest that may change client recommendations. Now don’t get me wrong, you will end up with many more choices from these advisors claiming to be independent but in my mind this still does not meet Webster’s definition of “Independent.” Hopefully this will give you a little more insight so that you can ask the right questions in the search for a true independent advisor

What is an Independent Pension Fiduciary?

By MARK FOLGMANN

The last 16 articles I’ve written were to educate the marketplace about some of the problems you face when you deal with the financial service industry. Today I would like to share what we do at Ark Advisors LLC and why we act as Independent Pension Fiduciary's for 401(k)s.

Our main objective is to protect and safeguard the retirement incomes of employees while improving overall retirement outcomes. We find that most employers do not have a very good way to evaluate and monitor the success of their plan. We are hired directly by the 401(k) therefore our loyalty is to the plan participants and this eliminates conflicts of interest. We accept fiduciary responsibility in writing therefore releasing the small business owner of many risks involved within the plan.

We also find that we must set reasonable expectations with the business owners that oversee the plans because we do not believe most people can increase their retirement income by thousands of dollars per month - but we do believe the average employee can increase their retirement income by $500-$700 per month by utilizing an Independent Fiduciary.

This may not sound like a tremendous amount of money but to a 78 year old trying to pay his heat bill or a retiree attempting to buy medicine for his ailing wife of 40 years; it’s a significant amount of money. This is why employers can’t become complacent by implementing a 401(k) and forgetting about it. It is not a financial product to be bought and sold but a delicate income producing system that has the ability to under girth the American economy for the next 25-40 years.

It’s critical that employers meet your employees halfway to assure success. Once you understand how important this issue is, you will start to ask yourselves some critical questions.

Is our retirement plan good enough so that when our employees retire they will have enough money to come back and purchase goods and services from us? Once we begin to understand the depth of this question we will start to understand the intended role of the Independent Fiduciary.

In most cases it’s my job to get the small business owner out of the retirement plan business so they can focus on running their business. At that point I can then implement a proven fiduciary process that will increase the overall probability for success within the plan.

This process is based on expectations, insurance is based on guarantees but everything in finance is based on expectations. Therefore, part of our process is to match plan cash flows with expected portfolio returns so that we can set expectations regarding retirement income. By combining these expectations with the lowest cost solutions, we can consistently improve retirement outcomes for the employees.

With proper fiduciary oversight, the 401(k)s in America will live up to their expectations and without oversight they are doomed to failure.

Mark Folgmann is president of Ark Advisors LLC in Traverse City. He has more than 25 years of experience within the financial service industry. To learn more about the plan review process discussed here, contact Folgmann at (231) 668-4118 or mark@arkadvisor.com.