Insights & Advice


What’s a Fiduciary and why should you care

In the financial services industry, most people don’t know the difference between a stock broker, insurance salesman, financial planner, advisor, consultant or wealth manager. That’s not an accident. Wall Street has spent a great deal of money and time confusing you on purpose. I believe in this age of confusion, misinformation and desire for honesty, most people want their advisors to treat them differently. But exactly how they should be different is, for most, difficult to describe.

Until last week, advocates for financial clarity (myself included) had hoped that the upcoming financial reform legislation would establish a standard for all of the above named whiz kids, but the Senate killed that hope. So now that you are once again on your own, I feel obligated to provide some clarity on the matter. In my opinion, the first and most important requirement of any financial provider is that they should act as your fiduciary.

In its simplest terms, fiduciaries are people who put your interest above their own and above their company’s interest. When it comes to your life savings, I believe this is crucial to your financial well being, but what does putting your interest first mean in concrete terms? Here are some examples.

Although the law requires that advisors invest their clients in “suitable” investments, i.e. investments suitable to your investment objectives and financial circumstances, there are thousands of suitable investments to choose from. Many of them have poor performance track records but coincidentally provide your broker or advisor with high fees at your expense. Other investments have very high expenses and good records while a few have low expenses and a great performance history. When you select a fiduciary, he or she takes the suitability rule one step further. They will act as your agent and seek the very best suitable investments for you at the best prices, at all times. They are also required to provide impartial advice and act with skill, care, diligence and good judgment when dealing with you and your investments.

In addition, when you hire a fiduciary, you will always know exactly what you are getting and where you stand since they are obligated to provide full disclosure of all important facts, including compensation from all products and services they provide, as well as fees paid to others on your behalf. If in the course of doing business, conflicts occur, those disputes must always be resolved in your favor.

Now not all fiduciaries are the same. Some may adhere to the letter of the law but operate within a gray area which is not quite legal or illegal. As an example, an investment advisor may say nothing but instead put a written disclosure in its brochure revealing a kick-back from a fund company. Usually, it is in tiny print buried among other financial jargon and legalese similar to the disclosures on the back of your monthly credit card statement. These advisors are counting on the fact that few people read these things.

It is up to you to discover these buried land mines and demand the advisor prove in writing that investing in those funds that provide him a kickback are in your best interest. Once caught, very few of these bad apples will present written evidence (because you can take that to the SEC) and instead try to verbally con you into accepting their arguments.

Some financial advisors are required by the Securities and Exchange Commission to act as fiduciaries, such as registered investment advisors and their representatives. If they violate their fiduciary responsibilities you can report them to the SEC.

Others, like Certified Financial Planners, are required to go through a rigorous two day examination in order to be certified by the Certified Financial Planner’s Board as fiduciaries. That does not preclude other financial service personnel from becoming fiduciaries. However, in practice, the goals and objectives of most other financial services firms are in conflict with these principles and do not want their employees to act as fiduciaries.

It was with this conflict in mind that countless efforts have been made to change the status quo, but Wall Street will have none of it. A fiduciary standard would threaten the very basic premise of their business, which is to make money at any cost, regardless of who must pay. Usually it’s the individual investor. Fortunately, you still have a choice.

So the next time you are shopping for a new broker, money manager or planner, insist that they and their firm sign this “Fiduciary Pledge” written by a Fiduciary columnist, Blain F. Aikin of “Investment News” presented below. If they won’t, run for the hills!

“I, the undersigned, pledge to exercise my best efforts always to act in good faith and in the best interests of my client, [insert client’s name here], and will act as a fiduciary. I will provide written disclosure, in advance, of any conflicts of interests that could reasonably compromise the impartiality of my advice. Moreover, in advance, I will disclose any and all compensation I will receive as a result of the products and services I provide you, and all fees I pay to others for referring you to me for the products and services I offer you. I recognize that you rely upon me, and are compensating me, for trustworthy advice; therefore, I acknowledge that this pledge covers all the products and services provided in this engagement.”

Posted in Financial Planning, The Retired Advisor