In Reality, What Are Independent Advisors?

When discussing retirement plans, we normally hear the word independent coming up very often; be it independent consultation, independent brokers and so on. But what does the word independent really mean in relation to plans?

More often than not, you will hear people saying that the have an appointment with an independent advisor. When discussing in more detail, you will find out that this so called independent advisor, is actually employed with a brokerage firm. So is he really independent or is this just a cover? Is the brokerage firm in question deriving any revenue from this advisor’s sales?

Legislation was passed in the 1970’s, which established the regulatory framework that retirement plans should be based upon. The interpretation of the ERSA, has over the years established the fiduciary discretion parameters. One of the aspects that require caution is the choice of retirement plan advisors, making sure they are competent to do the job. This does not mention ‘independence’ from the company.

Conflicts of interest are another matter to consider, and this is where being ‘independent’ enters the picture. Independent should mean that the advisor provides objective advice to his client, without any conflict of interest.

Let’s provide an example. Conflict of interest occurs commonly when a service provider such as a bank, is the 401k plan’s main guidance and support provider, for appropriate investment choices. It is obvious that when making investment choices are being made, the advisors would be somewhat biased. Providers do recognize this issue, and are wary not to give ‘advice’.

Therefore as a conclusion, investment advisors should always retain objectivity when performing their fiduciary function, because conflicts of interest may undermine the client’s rights.

Reference: http://www.401khelpcenter.com/401k/graham_independent.html