As of recently, the fiduciary standard – what it is and who is legally required to abide by it – has made the round of headlines. Just Googling “fiduciary standard” pulls up news article after news article about potential regulatory changes and the political arguments surrounding them.
The fiduciary standard is one of the most significant requirements within the financial service industry that protects investors. Investors are wise to want it and to want the fiduciary standard required of all providers of financial services. Wall Street, on the other hand, is keen to limit the spread of the fiduciary standard else it cut into profits.
When it comes to personal finance and your financial well-being, working with a professional who must put your best interests first isn’t just a good idea – it’s one of the smartest financial decisions you can make.
This post is designed to show you why a fiduciary is the best choice for your financial advisor. To do this, we’ll discuss the following topics:
• The importance of choosing the right financial advisor.
• The possible consequences of using a financial advisor who isn’t a fiduciary.
• Fiduciary vs. suitability standards.
• What a fiduciary is and what their obligations are.
The Right Financial Advisor
The person you choose as your financial advisor can be one of the most determining factors of your financial life. That’s when the right financial advisor comes into play. You need a financial advisor who can provide sound and objective advice.
But who is the ‘right’ financial advisor? Well, the short answer is this – the right financial advisor is one who has your best interests in mind, not their own. In other words, the right financial advisor is a fiduciary.
What a Fiduciary is and What Their Obligations to Clients Are
In the most general terms, a fiduciary designates an investment professional who is ethically and legally obliged to put their clients’ interest first, above both their own and any other entity who might benefit from a conflict of interest.
In other words, they have to live up to rules that are called ‘fiduciary standards.’ These standards, which are in marked contrast to the ‘suitability’ standards we’ll explore below include the following:
• The advisor is obliged to place their interest below the interest of their client.
• The advisor must reveal any real or possible conflicts of interest to the client.
• The advisor is obliged to their best to ensure that the financial advice they dispense is based on the most accurate and complete information.
As you can see, an advisor who adheres to fiduciary standards has very specific guidelines that dictate what ‘putting client interest first’ actually means. Working with someone who doesn’t can lead to less than optimal results for you and your family. Now let’s have a look at the difference between fiduciary and suitability standards.
Fiduciary vs Suitability Standards
If a financial advisor is not a fiduciary, this means that they only have to meet a set of requirements known as “suitability standards.” Put briefly, this means that the advisor must have a justifiable belief that the advice they are giving is suitable for you. Broker dealers are a good example of financial professionals who are held to a suitability standard. These are advisors working at Morgan Stanley, Bank of America, Edward Jones, and other large financial service retailers.
This is obviously significantly less protection for you as a client. It leaves far too much room for the advisor to place their interest over your own, especially in terms of recommending high commission investments over low commissions that are both 'suitable' for you.
For instance, let’s say an advisor recommends several mutual funds to choose from for your retirement plan. You would naturally ask your advisor which one he or she would recommend for your individual needs. Each option presented is ‘suitable’ for you and your retirement goals, but your advisor may recommend the one that pays him or her the highest commission over the one that may be the better choice for your situation. The suitability standard enforces that your financial advisor provides you with suitable options, but the fiduciary standard requires your financial advisor to provide you with the best option.
Unfortunately, not all financial advisors are created equal, especially when it comes to putting your interests first. Even if they work for a reputable and nationally known firm, some financial advisors have both the means and the incentive to do serious damage to your long term financial health.
The reason? Because not all financial advisors are fiduciaries. And if your financial advisor is not a fiduciary, then they are only required to meet 'suitability standards' that allow for too many conflicts of interest and are far from a guarantee that your interests will actually be served.
The bottom line is that your interests are best served by a financial advisor who adheres to the more rigid fiduciary standards than those who do not. Do not hesitate to find out right away if any advisor you're considering if he or she adheres to fiduciary standards. If not, continue searching until you find one who does.
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