Trust is earned and not given. While there’s no shortcut to years of working together and getting to know each other, there is one question that every client should ask their advisor: Are you a Fiduciary?
A Fiduciary has a legal obligation to place your interests ahead of their own. The alternative, of course is a salesperson whose purpose is self-serving: to represent their company and maximize profits. Which would you trust for objective, unbiased advice?
Unfortunately for consumers, not every Financial Advisor is a Fiduciary. In fact, virtually anyone can call themselves a “Financial Advisor”. That is just a generic term that does not carry any regulation, oversight, or guarantee of consumer protection.
My firm is a “Registered Investment Advisor”, or RIA. An RIA has a Fiduciary obligation to its clients, and charges fees for service rather than commissions. Since an RIA is compensated by fees, you are paying for planning, advice, and ongoing portfolio management, rather than for the sale of a product.
This is very different from a Broker/Dealer, or BD. In the old days, employees of BDs were called stockbrokers. That term developed a negative connotation, and today, you primarily see the title Financial Advisor or Vice President. I guess it looks more impressive for someone to be a “Vice President”, even if the firm then has 10,000 Vice Presidents.
BDs charge commissions and are not held to a Fiduciary standard, but to a lower legal requirement of “Suitability”. Suitability means that the broker has done enough homework to know their client and recommend a suitable investment, even if it is not necessarily the best investment for that client.
While there are many honest and ethical people working at BDs, there is an inherent conflict of interest in being paid by commission. Even the most trusting of clients has to be forgiven if they wonder, “Why is my advisor suggesting this fund? Are they just trying to make a sale? Do they get paid a higher commission on this product than on a different investment?”
If you understand the business side of it, you will probably trust brokers even less. They start the first of each month at zero dollars of income. Their employer has sales quotas that they must fill. If they don’t reach their targets, their employment may be in jeopardy. If they reach higher goals, they may receive a bonus or a higher payout. Sales are top priority and high pressure on employees may not encourage the most ethical standards.
Brokers don’t get paid for last month’s or last year’s sales. If they want to take several hours out of their sales activity to service your account or to do planning, they have to get paid for their time. And how they get paid is by selling one thing and buying something else. Did you need to make those trades? How do you know?
Right now there is a proposal in Washington that would hold all Financial Advisors to a Fiduciary Standard. You would think that this improved level of consumer protection would be an easy sell given the carnage inflicted on the public by the crash of 2008. The CFP Board of Standards and the Financial Planning Association support the proposed Fiduciary rules. However, a group of Wall Street Broker Dealers are spending millions in lobbying efforts to defeat the proposal. They don’t want to be held to a Fiduciary standard.
As for me, I am proud to be an RIA. I try to model my business on the Golden Rule, and ask “How would I want to be treated as an Investor?” And the first thing is that I’d want to work with someone who is a Fiduciary and who takes that responsibility seriously day in and day out.
