by Charles L. Stanley CFP® ChFC AIF®

As a take off on the old adage of, Which came first the chicken or the egg? I want to ask the question, Which comes first the investor or the Advisor?

What seems to be a discussion limited to the insiders of the financial services community shouldn’t be. Within the realm of personal financial advice, there is heated discussion going on about fiduciary standards versus a suitability standard and who is a fiduciary and who is not, or a “Who wears the white hat?” and “Who wears the black hat?” kind of discussion.

Part of the issue revolves around conflicts of interest created by the form of compensation. Is it better to work with a “Fee-Only” Advisor, one who accepts no form of compensation except that paid directly by his client. That means no referral fees, commissions, kick backs or other forms of compensation.

So, yes, there is a significant difference between “Fee-Only” and “Fee-Based” Advisors, but most consumers and even many financial journalists don’t seem to realize that they are different; something that “Fee-Based” Advisors are happy about.

What difference does compensation make? Can’t an Advisor be competent and do a good job regardless of whether he is paid a commission along with its inherent conflicts of interest or a simple and direct fee? Of course.

So, what really are we talking about? I think we are really talking about the culture in which services are delivered; and that is really important to you, the consumer.

There are essentially two cultures for financial advice:

1. A culture in which the interests of the client are taken into account before the revenue stream interests of the Advisory firm; or,

2. A culture in which the advice must benefit the revenue stream of the employer first (regardless of the source), and only secondarily benefit the consumer.

The first is a fiduciary culture; the second is a sales culture. The first will be held to a fiduciary standard, the second is only subject to a suitability standard. The first is the culture of the Registered Investment Advisor, the second is the culture of the Registered Representative (aka a stock broker).

The real foggy area comes in with hybrid or “Fee-Based” firms where sometimes, with the same client, they are providing advice for a fee and other times they are acting in the role of a Registered Representative who sells investment products for a commission. When they are providing advice for a fee, they are required to act in a fiduciary capacity and are held under the law to a fiduciary standard like a CPA or an Attorney. However, when they switch hats to providing product as a Registered Representative, they are now operating as a salesman under a suitability standard and have a fiduciary duty to their employer, the Broker/Dealer by whom they are employed. And, when they switch hats, they should inform you that they have changed roles, but I bet they won’t.

If you think this is confusing for you as a consumer, let me tell you it is also confusing for a financial professional trying to keep this straight. I know, I did it for years. I am a recovering hybrid. Finally, I couldn’t take it any longer and left the Broker/Dealer world so I can always work under a clear fiduciary mandate and I can put the interests of my clients first – always.

The powerful forces of the major Wall Street firms don’t want the public to really understand this. I may get into trouble for writing this, but for years the regulators have allowed them to operate with a certain amount of deception toward the consuming public. There have been many television ads for major Wall Street firms that talk about giving advice to clients and putting your needs first, blah, blah, blah. Then, at the end of the ad, in print too small to read (and even if you could see it to read it, it goes by too fast) and is read by an announcer that speaks so fast no one can understand him; it is disclosed that they are really brokers and not Advisors.

This supposed disclosure is designed to give them cover in the event of an arbitration case.

Does this manifest the culture you want to work with? Does it sound like your interests are really going to come first with this firm?

So, how does an ordinary consumer like you sniff out what is really going on here? Well, it is really quite easy. Just ask one question and it will give you the answer. Ask your potential Advisor (or if you work with someone now, ask them this question), “Are you ALWAYS a fiduciary in your business relationship with me?” You should get a simple yes or no answer. If you get some kind of hem or haw then you know that this is not a trusted fiduciary relationship; the one in option #1 above. You have a #2 business type relationship. If you have a #2 type relationship, you might want to rethink it, or at least know you have to keep you eyes open and it is a buyer beware relationship, not one where you can be more relaxed because you know your Advisor is free from the conflicts of interest that exist in the Broker/Dealer world.

If you want to find a fiduciary Advisor, there is one organization that is made up strictly of Advisors who have embraced fully the #1 type relationship, the fiduciary relationship, where your interests come first; it is the National Association of Personal Financial Advisors, or (NAPFA). Every Registered NAPFA Financial Advisor annually signs a fiduciary oath. These Advisors have taken the conflict of interest created by commission based compensation out of the picture. They are the “Fee-Only” Advisors and, in my opinion (and I admit I am prejudice, because I am one), they are the guys with the white hats.

Now, you know that there is a difference between those who provide financial products for a commission and those who provide financial advice for a fee.

To insulate yourself from bad actors, get a free copy of Charles Stanley’s Special Report: How to insulate yourself from being Maodff’d. Bernie Madoff is the Wall Street broker who allegedly made off (get the pun) with $50 Billion of his client’s money. Don’t let that happen to you.


IRA Rollovers
Frequently Asked Questions

What is an IRA Rollover?
An IRA Rollover is a tax-free transfer of funds from a tax-deferred plan, such as a 401(k) plan, Thrift Savings Plan, Defined Benefit Plan, 403(b) Plan, etc., to a traditional IRA. An IRA Rollover can be done when an employee changes jobs, is laid off or retires and is entitled to a distribution from the old employer’s 401(k) plan or other Qualified Retirement Plan. By doing an IRA Rollover, the funds can be transferred tax-free to the employee’s own IRA. This means the funds can continue to grow on a tax-deferred basis inside the IRA. It also means that the funds are under the complete control of the employee with respect to investment decisions and future distributions.

The term “IRA Rollover” can also be applied to a transfer of funds from one IRA to another IRA. This too can be done on tax-free basis under a different set of rules that apply to IRA-to-IRA rollovers. Those rules are covered separately.
IRA Rollovers from Employer-Sponsored Plans

When is an IRA Rollover permitted for distributions from an employer-sponsored plan?
An IRA Rollover is permitted for any “eligible rollover distribution” from an employer-sponsored plan. This includes distributions from 401(k) plans when an employee changes jobs or retires, but also includes eligible rollover distributions from other employer-sponsored plans, such a qualified pension and profit-sharing plans, defined benefit plans, 403(a) annuity plans, 403(b) annuity contracts and governmental 457 plans.

What is an “eligible rollover distribution” from an employer-sponsored plan?
Any distribution, whether all or less than all of the employee’s account, is an eligible rollover distribution, except for the following:

• Any distribution which is part of a series of substantially equal periodic payments (SEPP);
• Any required minimum distributions (RMD);
• Any distribution which is made upon hardship of the employee;
• Certain returns of elective 401(k) contributions, corrective distributions, loans treated as distributions, and similar items.

When can I take a distribution from my 401(k) plan or other employer-sponsored plan?
Distributions from a 401(k) or other employer-sponsored plans are governed by IRS rules as well as the terms of the plan. In general, plan distributions require a triggering event, such as:

• Termination of employment
• Attainment of the plan’s normal retirement age
• Death

Check with your plan administrator to be sure that you are entitled to a distribution under IRS rules and the terms of the plan and to determine what procedures are used to request such a distribution.

How are IRA Rollovers from employer-sponsored plans done?
The employee usually has a choice of two methods to accomplish the IRA Rollover – the direct rollover or the indirect rollover.

Direct Rollover

In a direct rollover, which is also sometimes called a “trustee-to-trustee transfer,” the eligible rollover distribution that is transferred directly by the employer-sponsored plan to the employee’s IRA. The funds are never actually transferred to the employee individually.

Indirect Rollover

Under the indirect rollover method, the employer-sponsored plan writes a distribution check to you, you then deposit the check in your own account. You then have 60 days to transfer all or a portion of the amount received in the distribution to an IRA. The distribution is not taxable to you if you do the transfer within 60 days.

What are the advantages and disadvantages of the direct rollover vs. the indirect rollover for distributions from an employer-sponsored plan?
An important advantage of the direct rollover method is that it allows you to avoid the IRS mandatory withholding rules. Under those rules, when a distribution is made by the plan to you, even if you intend to roll over the distribution into an IRA within 60 days, it is subject to a mandatory 20% income tax withholding rule that applies to all qualified plan distributions.

This means that the actual distribution check will represent only 80% of the amount of the distribution that is eligible to be rolled over. Therefore, in order to satisfy the 60-day rule for the entire distribution, you would need to “make up” the withheld 20% out of other funds (if available) to complete the rollover. Otherwise, the 20% withheld would be treated as a taxable distribution that was not rolled over on time resulting in only 80% of the distribution being tax deferred.

There may be practical advantages to the direct rollover as well. The transfer of funds can be handled directly by the two institutions. This eliminates concerns or mix-ups regarding calculating the 60-day period and making sure you comply.

If you have a short-term need for funds, the indirect rollover does give you use of the funds for up to 60 days, which is not the case with the direct rollover. In most cases, that is not a significant consideration. And does open you to the possibility of not being able to deposit the fund into your IRA in time.

Are employer-sponsored plans required to give employees the option to do direct rollovers?
Yes, as long as the direct rollover is to an IRA. Every plan, as a condition of qualification, must provide that a recipient of an eligible rollover distribution may elect to have the distribution transferred directly to an IRA. Distributions of less than $200 are excluded from the direct rollover requirement. (See below direct rollovers from other eligible retirement plans.)

What procedures are used to elect a direct rollover?
The plan administrator can use any reasonable procedure for you to elect a direct rollover. That is why it is important for you to check with your plan administrator about the IRA Rollover process.

How is the direct rollover done?
A direct rollover may be done by any reasonable means of direct payment to the IRA chosen by the plan administrator, including:

• A check mailed by the employer-sponsored plan to the IRA custodian or issuer of the IRA annuity, as long as the check is negotiable only by the IRA custodian or annuity issuer;
• A wire transfer, as long as it directed only to the IRA custodian or annuity issuer;
• Hand delivery of a check by you to the IRA custodian or annuity issuer, as long as instructions are given to you to deliver the check to the IRA custodian or annuity issuer and the check is made payable to the IRA custodian or annuity issuer.

Can employer-sponsored plan benefits be rolled over into other types of retirement plans besides IRAs?
Yes, maybe. Eligible rollover distributions can be made to any “eligible retirement plan.” This means, in addition to an IRA, another qualified plan, a 403(a) annuity plan, a 403(b) annuity contract, or certain governmental 457 plans. For example, this rule enables an employee who is switching jobs, who is entitled to a distribution from the prior employer’s 401(k) plan, to roll over his or her plan benefits to the new employer’s plan, whether it is a 401(k) or some other type of employer-sponsored plan.

Although many employer-sponsored plans do accept such rollovers, note that an eligible retirement plan does not have to accept rollover distributions. So any employee who wants to move his or her 401(k) balance from an old employer to the new employer’s plan needs to make sure that the new employer’s plan accepts such rollovers. If it does not, then the employee would still be able to do an IRA Rollover.

Can after-tax amounts in an employer-sponsored plan be part of an IRA Rollover?
Yes, after-tax amounts can always be rolled over from an employer-sponsored plan to an IRA. However, for rollovers to other eligible retirement plans, the only employer-sponsored plans that can accept after-tax amounts are defined contribution plans that agree to separately account for the pre-tax and after-tax portions of the rollover.

IRA Rollovers from IRAs

What are the rules for IRA Rollovers from one IRA to another IRA?
The rules are very similar to those for employer-sponsored plans, but take into account the technical differences between an employer-sponsored plan and an IRA.

Since an IRA owner can take distributions any time from the IRA, subject only to potential premature distribution penalty taxes, there is no requirement that the distribution constitute an eligible retirement distribution before it can be rolled over. Thus, in general, it is easier to do an IRA-to-IRA rollover. However, there are other rules that also need to be satisfied.

Partial distributions from an IRA can be rolled over, but a required distribution under the minimum required distribution rules (RMDs) cannot be rolled over.

In the case of an IRA-to-IRA rollover, how can the rollover be accomplished?
You can do this either as a direct rollover or an indirect rollover, just as a rollover from an employer-sponsored plan. Either method results in a tax-free transfer of the funds from one IRA to another IRA. Since the mandatory withholding rules do not apply to IRA distributions, that is not a factor for choosing one method or the other.

The main difference is that, in the case of an indirect rollover (i.e., a rollover in which the funds are distributed from an IRA to the IRA owner who then has 60 days to transfer them to another IRA), such a rollover is limited, for each IRA owned by the IRA owner, to one such indirect rollover in any one-year period. If an individual owns more than one IRA, a tax-free indirect rollover from one IRA will not prevent another tax-free indirect rollover from a different IRA within that one-year period.

The key point is that the one-rollover-per-year rule does not apply to trustee-to-trustee transfers. The direct rollover thus eliminates a potential technical issue the individual wishes to do a second rollover of those funds within a one-year period.

There are also practical advantages to the trustee-to-trustee transfer, including the practical benefits of moving the funds by wire transfer, if available, as well as avoiding any need to calculate and comply with the 60-day rule.

Obviously, if you have a short-term need for cash, the indirect rollover does give you the use of those funds for up to 60 days, which is not the case with the trustee-to-trustee transfer, but those instances where that is an important consideration are not common.

Can additional funds be added to the Rollover IRA in the future?
Yes. You can either make annual contributions to the IRA under normal IRA contribution rules or can make future IRA Rollovers to the IRA. Old rules that prevented or discouraged commingling of rollover funds with non-rollover IRA amounts have been repealed.

You should not use this information as a basis for legal and/or tax advice. In any specific case, the parties involved should seek the guidance and advice of your own legal and tax counsel.

The San Diego Union Tribune reported on September 20 that SAIC would be laying off 89 workers on November 1, 2008. If you are among those 89 workers, you have several forward-looking decisions to make, one of which is what to do with your retirement money you accumulated while at SAIC.

In a down economy and with San Diego County’s unemployment rate having gone from 4.8% to 6.5% in the past  year, you might be tempted to do a bad thing – simply cash out your 401(k) plan and bite the bullet on the taxes. Bad idea. First, you probably don’t realize the magnitude of those taxes. You will need to take your income tax bracket for your income this year and apply it to every dollar coming out of your 401(k). Lets say you are in the 25% bracket. Then you will pay a Federal penalty for early withdrawal (this assumes you are younger than 59 1/2) of 10% – now you are at 35% of the funds going to taxes. But wait, you aren’t done yet. There is also a California income tax to consider of at least 6%, taking you to 41%. And then there is the California Penalty for early withdrawal of 2.5%. Now you are at a whopping 43.5% of the funds you take from your retirement plan going to State and Federal taxes.

So, I think you can see that taking these funds without trying every other option available to you just isn’t a good idea. It will take you years to make up for the loss – and the truth is that you will never make up for it since you will have lost the time value of those dollars that are no longer invested on your behalf. For the sake of your long term financial well-being, make it your place of LAST RESORT to go for money to make it on to the next profitable job. Afterall, it may be just around the corner. You just don’t know right now.

It would be much more prudent to do a Direct Rollover of your retirement funds to a Traditional IRA and aviod any income tax consequences. Once this is done, you have complete control of your retirement dollars. If you do eventually find that you have to take some of those funds early and pay the penalties, you can only take what you absolutely have to take. You won’t be restricted by the withdrawal rules of the employer’s plan.

If you don’t know how to get that done efficiently and with little cost, you can contact me at

Charles L. Stanley CFP® ChFC AIF®
Oncubic LLC
3655 Nobel Drive Ste 340
La Jolla CA 92122
Telephone: 888-619-5666 x506