We were recently asked by another potential client whether he should convert all or part of his traditional IRA to a Roth IRA. His current representative suggested that he do so by selling assets in the traditional IRA, transferring the cash to a new Roth IRA, and purchasing new investments in that new account. There were two things that were troubling about this recommendation. The first was that our analysis indicated that this client was not a good candidate for a Roth conversion. Also, we questioned why the advisor would recommend that mutual funds be sold in one account and repurchased in another. If, in fact, a Roth conversion were a viable strategy why not simply transfer funds in kind from one account to the other? Could it have been that this transaction would not have generated any new income for the advisor?
Barbara taught school for most of her life and retired early at the age of 60. She had accumulated substantial assets over her lifetime, but 100% of her investments were either in 403(b) plans or tax-deferred annuities. Therefore, she like Frank was unnecessarily in a situation where she would have to pay taxes on any money she withdrew for living expenses. In addition to the nonqualified annuities, almost all of her 403(b) investments are in annuities.
I simply cannot understand why putting annuities with insurance expenses of 1.4% to 1.5% into qualified plans is still so prevalent. In order to reduce the tax burden, we were forced to annuitize some of the nonqualified annuities. This strategy would've been unnecessary had the agent recommended that enough of her nonqualified money be invested in accounts that would have been more tax efficient when she retired. Of course, with the amount of money she had, investing in mutual funds with breakpoints would not have provided as much revenue for the advisor as the annuities did.
No doubt, this article will not be positively accepted by some. Others, I suspect, will agree with my conclusions. I can never understand why it is permissible for a CFP practitioner to remove his fiduciary hat when he is in a "sales" mode and put it back on when he is in a "financial planning" relationship. In my view, the CFP designation should signal to consumers that in all of their dealings with certificants they are assured that their interests will come first.
One of the examples that is used by many as a non-fiduciary relationship is when a client calls and asks to buy a particular investment. If that investment is not in the best interest of the client, I believe the CFP practitioner has an obligation to tell him that. The fiduciary hat must remain on at all times. Imagine a patient asking a doctor to prescribe a drug that is not in her best interest. The doctor can not dispense of the Hippocratic oath and prescribe the drug. So it should be with all CFP practitioners. If we are ever to become a profession, nothing less than that should be acceptable.
Principle 2 of the CFP code of ethics (objectivity) states, in part, that "regardless of the particular service rendered or the capacity in which CFP Board designee functions [my emphasis], a CFP Board designee should protect the integrity of his or her work, maintain objectivity, and avoid subordination of his or her judgment that would be in violation of this Code of Ethics." Putting the client's interests first at all times would be a good start. It is also good business!
Roy Diliberto is chairman and founder of RTD Financial Advisors Inc. in Philadelphia.