November 21, 2019Individual Investment Management

DALBAR - Your Advocate as a Client!
Certain industries carry with them elevated levels of scrutiny.  Similar to health care and banking, the world of investment advisory is heavily regulated and layered with multiple levels of checks and balances.  Not all practices are required however, and it pays to understand why a firm would use DALBAR's services and what that means to you as a Client.  Here at ACG, we have used DALBAR's services for many years to ensure consistent Client care, to document processes, and to ensure that we are adhering to proper disclosures. 

The Core Issue DALBAR Addresses:
In 2006, Congress passed a sweeping regulation called the Pension Protection Act (PPA).  Among many of its reforms, the PPA addressed and defined the following fundamental question:  Are retirement plan investment advisors allowed to give advice to individual plan participants if that advisor already gives advice to the plan?  

The conclusion of the PPA was that said advisors are indeed allowed to do this, as long as the proper independent auditing and disclosure procedures have been instituted - hence the importance of DALBAR!

What does DALBAR do?
Simply put, DALBAR's business is to conduct yearly audits of the business practices and compliance processes for those who charge for financial advice - and that makes them your best friend as a Client!

Broadly speaking, there are 3 types of rules in our industry:
1.  Rules that serve the Client. (We focus here only.)
2.  Rules that serve the system.
3.  Rules that serve a common standard.

Launched in 1976, DALBAR is the financial community's leading independent organization for evaluating, auditing, and rating the business practices of financial advisors.  It is not affiliated with a government entity, and therefore is an optional process that firms may use at their own cost to rate their quality process standards.

Only Fiduciaries Use DALBAR!
DALBAR standards have been hugely influential toward the widespread adoption of transparent pricing among financial advisors.  In addition, DALBAR audits and annual compliance reviews are partially responsible for the industry's gradual push to adopt the "fiduciary standard" that we have discussed in this column before.  

Does your Advisor use DALBAR?

Most firms in the industry do NOT use DALBAR's audit services.  Why you ask?  Because most industry participants are NOT fiduciaries!  A fiduciary is legally bound to act in your best interest, and is not allowed to earn commissions or performance-based compensation.  This eliminates many within the industry.  This includes large, nationally recognized brokerage houses and commission-based sales agents and insurance agents.  It is estimated that only 10-15% of the entire industry regularly uses DALBAR's services to ensure proper Client care.


"It is estimated that only 10-15% of the entire industry regularly uses DALBAR's services to ensure proper Client care."

How We Use DALBAR here at ACG:
Here at Advanced Capital Group, we use annual DALBAR audits to do the following:
      - Ensure consistent Client contracts.
      - Properly disclose fees and costs.
      - Ensure consistent reporting standards.
      - Disclose any potential conflicts of interest.
      - Establish timelines and guidelines.
      - Disclose Client risks.
      - Disclose portfolio contents and analytics.
                ...and much more!

The next time you choose to engage with a financial advisor, it is OK to ask him or her if they adhere to DALBAR standards or will engage with you as a fiduciary.  If they are not, it may be wise to take your business elsewhere and seek out an advisor experienced in such practices.