Wednesday, October 17, 2018

Vanguard Announces Share Class Change (lower prices) in Public 403(b) Target Date Funds

Vanguard is sending out letters to Plan Sponsors letting them know that the target date offerings within their Custodial 403(b) product (for public school employees) is changing to the Institutional share class. The Institutional share class has a minimum of $100 million requirement for most plan sponsors, but now participants in multi-vendor 403(b) will gain access to them. Vanguard says:
The expense ratios for the current offering of Vanguard Target Retirement Funds range from 0.13% to 0.15% (between $1.30 and $1.50 for every $1,000 invested). Each Vanguard Institutional Target Retirement Fund, in comparison, has an expense ratio of 0.09% ($0.90 for every $1,000 invested).
I've attached the letter below.

Tuesday, May 08, 2018

You Might Be A Phony Consultant If…


School Districts Beware


There are a lot of people and companies presenting themselves to school districts as something they are not, consultants. They tell the school district officials they are “independent” consultants, in reality they are product salespeople disguising their sales process as “consulting”. This is not just misleading, in my opinion (I’m not an attorney) it’s fraud or at least fraud adjacent (you decide, definition at end of post). School districts need to be very careful who they allow on to their campus and who they take advice from, much of the time that advice is highly conflicted and not in the school district or its employee’s best interest.

A consultant is someone who provides advice as a fiduciary and for a disclosed fee. A consultant places the interest of their client ahead of their own. Any potential conflicts that do exist are minimized as much as possible or fully disclosed (and not just in small print). The allegiance of a true consultant is only to their client. A consultant gets paid directly by the client, not a third party.

Over the years I’ve seen many insurance agents and registered representatives (not to mention some compliance administrators) represent themselves as consultants when the main purpose of the consulting (or free education or free financial literacy) is to sell financial products that benefit themselves.

How can you tell the difference? I’ve put together a few questions for plans sponsors to ask:

  1. What percentage of your income comes from fees and what percentage from commissions, including your firm and its affiliates. Not from just this job, firm wide. Disclose over past five years.
  2. Are you a Registered Representative? 
  3. Are you or your affiliates life insurance agents?
  4. Will you sign a fiduciary pledge?
  5. Do you accept non-cash compensation from third parties? Please list each and the form of compensation (over the past five years).
  6. Do you receive any income from third parties or parties to which you will be potentially consulting on? If so, please list.

This is not an exhaustive list and you shouldn’t take the word of the individual or firm providing the answers, you should do some research. You should check with FINRA, the state insurance commission and the SEC to verify license and registration information. You should look the company up on google and research their social media accounts for additional clues. If this company (and their employees) are going to be working on your behalf, you better know that they are ONLY working on your behalf.

The answers to the above question should be as follows:


  1. 100% fees (or as close to this as possible).
  2. No. With limited exception, the answer should be no.
  3. No. With limited exception, the answer should be no, but if yes, there should be another set of questions to determine why the insurance license is necessary.
  4. 100% yes, where do I sign?
  5. Absolutely not. Never have, never will.
  6. 100% no. All of our compensation comes directly from our clients.


For you phony consultants out there (and you know who you are), you’ll know that I’m referring to you by the following:


You might be a phony consultant if….



  • Your income comes from selling products, not services.

  • You are named as the agent or broker of record on financial products (with limited exceptions).

  • You don’t fully disclose or mitigate your conflicts of interests.

  • You won’t sign a strong fiduciary pledge.

  • You won’t disclose where your compensation comes from (all your compensation), not just compensation earned by that particular school district or particular engagement.

  • Your compensation comes from a third party, worse, an undisclosed third party.

  • You recommend products that your firm receives compensation from.

  • You take trips paid for by a product vendor whose product you’ve sold or might sell in the future.

  • You preach financial literacy, while relying on information asymmetry to sell products.

  • You speak at financial conferences and use the term “consultant” to refer to yourself even when you receive most of your compensation from product sales.

  • You place ads to recruit for job openings that do NOT pay a salary, instead rely solely on commissions.

  • You throw around terms like “independent” or “unbiased” but really mean you can sell any product, not that you are independent from product sales.

  • You are appointed with or affiliated with any of the following insurance companies: Midland National, National Life Group, Great American, Americo, Allianz.

  • You receive marketing dollars from any company that wants you to sell or recommend their product(s).

  • You decided to add fee-based products to your list of offerings, without stopping the sale of commission based products.

  • You fail to pursue appropriate designations or adhere to strong codes of ethics.

  • Your income comes from product vendors, even if in the form of fees (with limited exceptions).

  • I’m sure I’ll come up with more of these in the future, but this is a good start. In case you are wondering (and I hope you are) what I have to disclose, keep reading.

Observation and Disclosure:

I’m a consultant (though most of my business is working as a fee-only, fiduciary financial planner).

One of my clients is a large retirement system that offers a low-cost, fiduciary based 403(b) and 457(b) product. 

I’m also a financial planner (a fee-only, fiduciary who holds the CFP designation and adheres to a strong Code of Ethics).

I often recommend that my financial planning clients purchase the product that I consultant for. This represents a conflict of interest. 

I’m not compensated by the product vendor to recommend their product, but I receive compensation from that product vendor nonetheless. My job as a consultant is NOT predicated on me recommending the product vendor that I consult with, but I do think it’s the best option in most cases and will recommend it. I have the freedom to not recommend it. I fully disclose this to my clients and provide alternatives to them should they desire another option.

I do NOT offer my consulting services to school districts in the state in which I’m the consultant for a product vendor that could be considered. I’ve been asked on numerous occasions (I’ve left a lot of money on the table) to consult for school districts in California. I provided services one time to a school district and fully disclosed my conflict and only provided analysis, not a recommendation, but decided after that engagement not to offer my consulting services again in such a situation (even if I am the best option). This is what a consultant does. It kills me to not offer my services to school districts that want to hire me, especially considering that I feel I can be unbiased, however, it would taint the process and for me, that defeats the purpose of consulting.

The point of this post is not to draw attention to myself (I’m not actively taking on new consulting clients), it’s to draw attention to the charlatans that I see parading around school districts across the nation who use information asymmetry to profit at the expense of our nation’s teachers and school employees.

Teachers and school employees deserve high quality, fiduciary advice, not self-interested product sales.

Scott Dauenhauer, CFP, MPAS, AIF

Merriam-Webster Dictionary definition of Fraud:

1
  • a : deceit, trickery; specifically : intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right was accused of credit card fraud
  • b : an act of deceiving or misrepresenting : trick automobile insurance frauds


2
  • a : a person who is not what he or she pretends to be : impostor He claimed to be a licensed psychologist, but he turned out to be a fraud.; also : one who defrauds : cheat
  • b : one that is not what it seems or is represented to be The UFO picture was proved to be a fraud.