The Fiduciary Standard: Why is it so important?
Are your financial advisors working in your best interests? Or their own? It's a very big deal and you must find out. Fortunately, it's easy to do. Just ask!
Financial advisors in the US come in all shapes and sizes but they generally can be put in one of three categories .. a broker (think Merrill Lynch, Morgan Stanley etc.), an insurance agent (think Northwestern Mutual, Prudential etc.) or a Registered Investment Advisor (think Anglia Advisors etc.)
Here is the best list I have seen recently of the questions that you should ask any financial advisor before you consider hiring them.
Every financial advisor is legally subject to one of two standards: the fiduciary standard or the suitability standard.
THE FIDUCIARY STANDARD...
...requires that advisors always put their clients' best interests ahead of their own and those of their employers, disclosing any and all conflicts of interest and resolving any conflicts that may arise to the benefit of the clients. Solutions can be recommended only if they are, in the opinion of the advisor, the best available in terms of the clients’ interests, regardless of any advantage that may be accrued to advisors by recommending them.
It imposes a duty of loyalty and care on advisors, ensuring they do their best to give the most thorough and accurate analysis possible. Advisors must guarantee that clients understand the cost implications of the entire engagement (not just the fees you are paying to them).
The client is at the heart of the fiduciary relationship.
THE SUITABILITY STANDARD...
...offers no such comfort. Instead of placing the clients’ interests above their own, the suitability standard only requires these advisors to "reasonably believe" that any recommendations made will not be entirely unsuitable for their clients. Another key distinction is that the advisors’ first duty is not to their clients, but to their employers. As long as it falls within the broad suitability requirement, recommending the least suitable of what can be a multitude of "suitable" options still satisfies the suitability standard.
The suitability standard also invites severe conflicts of interest in terms of advisor compensation, which varies greatly from one product to another. This incentivizes advisors to promote and sell products that best benefit themselves in terms of commission, far ahead of what is most beneficial for their clients. Advisors are not even required to disclose any of these conflicts of interest to their clients who are unlikely to ever know, unless they specifically ask.
Scandalously, the suitability standard does not even require advisors to make any attempt whatsoever to try to minimize these conflicts.
The product is at the heart of the suitability relationship.
According to the White House Council of Economic Advisers, the suitability standard costs Americans $17 BILLION in unnecessary fees and commissions, pocketed every year by non-fiduciary firms and advisors.
Imagine one hundred available investment options, ranked from 1-100 in order of how suitable they would be for you. Let's say 10 of them are clearly entirely unsuitable in your case.
An advisor under the suitability standard could perfectly legitimately recommend the 90th best investment for you on that list, if it benefitted him the most in commissions paid to him by the provider of that investment, and still meet the suitability standard!
The fiduciary advisor must recommend what he believes to be the number one most suitable investment for you on the list and receives no commissions from the provider of that investment. That's the difference!
For a more irreverent take, watch John Oliver here
ANGLIA ADVISORS ACTS UNDER THE FIDUCIARY STANDARD AT ALL TIMES.
HERE IT IS, IN WRITING:
Anglia Advisors is proud to be listed as a committed firm by the Committee For The Fiduciary Standard.
Would you allow a doctor to treat you if he refused to commit to always act in the best interests of your health and took kickbacks from just one brand name pharmaceutical firm for prescribing their products? Of course not.
But you are putting your financial health at the same kind of risk if you work with a commission-based advisor who is not a fiduciary.
So, whether you engage with Anglia Advisors or not, please do NOT hire a financial advisor who will not commit in writing to act as a fiduciary to you at all times for all of their services.
Beware of titles. There is no regulation which covers what anyone calls themselves. Being called a financial planner, financial advisor, financial coach, money coach, investment advisor, wealth manager or any other seductive name is meaningless. Anyone can give themselves these titles and requires no qualifications to do so.
Qualifications such as CFP®, however, are indicative of a very significant course of study, the passing of a highly challenging exam and adequate, appropriate experience in financial planning.
The CFP® designation also generally comes with a requirement for the advisor to act as a fiduciary when conducting financial planning, although as this article points out, there are still some questions you need to ask about compensation methods and employer obligations, even if your advisor does hold a CFP® designation (see below for exactly what to ask them).
As a Registered Investment Advisor (RIA), however, a fiduciary responsibility is mandated. It is this type of firm you should seek out.