The Federal Reserve Bank’s preferred measure of inflation, the Personal Consumption Expenditure’s Index, was released last week and came in as expected, with inflation remaining above the Fed’s 2.0% target. Also as expected, the Fed did not cut rates further at their meeting. What was unexpected was the new AI model that was released by DeepSeek, offering a reportedly more powerful model than ChatGPT at a fraction of the cost, using less expensive and less powerful computer chips. Nvidia’s stock price fell 17% on Monday before largely rebounding, finishing the week down just under 5%. With that one stock making up almost 7% of the S&P 500, that drop rippled across index funds.
Continuing with our discuss last week of how advisors and agents are paid, another category of financial professionals is Registered Representatives. Registered Representatives hold either a Series 6 or Series 7 licenses through FINRA, the Financial Industry Regulatory Authority. A Series 6 license allows a rep to sell mutual funds for a commission, along with variable insurance products, such as variable universal life and variable annuities, if they have an insurance license. Most states also require a Series 63 license, which focuses on securities laws.
A representative may have a Series 7 license in place of or in addition to a Series 6. The Series 7 allows the sale of individual stocks and bonds in addition to mutual funds. A Registered Representative works for a Broker-Dealer and is paid a commission based on sales of securities. Without additional licenses, they cannot provide comprehensive financial planning but may provide advice incidental to the sale of products. Registered Representatives are not subject to a fiduciary standard. The SEC recently created a best-interest standard, which requires additional disclosures for professionals with a securities license. It does not require those professionals to act in your best interest; rather, it requires conflicts of interest to be disclosed, and a client’s best interest served as well as possible given those conflicts.
An example here is mutual fund sales. Mutual funds purchased through a Registered Representative can have two advisor costs: an up-front sales charge, which varies with the type of share. An A Share, for example, commonly has a 5.75% up-front cost, designed for investors who tend to buy and hold. A C Share typically does not have an up-front charge. The second cost to owning mutual funds is a 12b-1 fee, often called a trail. With an A Share, these are usually lower, around 0.25% annually, while a C Share often has a 1% trail.
It becomes complicated when you look at potential conflicts of interest. Most A Shares have breakpoints, where, if you invest a certain amount into one mutual fund company, your up-front charge is reduced. While there may be valid reasons to invest in multiple mutual fund companies, an unscrupulous advisor can sell multiple fund families to avoid hitting a breakpoint, keeping their commission higher. It becomes murkier still when you look at which mutual fund companies a broker-dealer allows their representatives to sell. Not all firms offer all products, and some offer proprietary funds, only available through their company. Which means that if you want to leave your financial professional, you’ll need to sell everything, which may have tax implications.
Great questions to ask include why the representative is recommending these specific funds and the share class for you. FINRA has a great fund comparison tool on their website at finra.org.
Your action item this week is for folks who will be 60 to 63 this year. The SECURE 2.0 Act allows you to contribute an additional $3,750 to your employer-sponsored retirement plan, for a total of $34,750. If this is you, consider further increasing your contributions to this higher maximum.
Check out our website at covingtonalsina.com, or our Facebook page, for more information and to see our upcoming educational events.
CovingtonAlsina is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.