It may be a shock the answer to this question is in many, many cases, NO. Let me explain.
There is currently much controversy in the government right now over what’s called the “Fiduciary Standard.” The word “fiduciary” comes from the Latin “fiducia,” which means “trust.” A fiduciary adviser should be looking out for the best interest of the client, and have a relationship built on total trust and honesty.
We wrote in “What Your Financial Advisor Doesn’t Want You To Know” and “The ‘F’ Word You Should Be Aware Of” about the different ways Financial Advisors are structured, and the significant difference it can make to you, the consumer. I’ve seen numerous articles talking about how few Financial Advisors and Financial Planners actually are held to the Fiduciary Standard. The general answer is NOT MANY!
The truth of the matter is: Many financial advisors and financial planners are not fiduciaries; they are brokers who are subject to a “suitability” standard. With suitability, the SEC says the financial advisor “must have a reasonable basis for believing that the recommendation is suitable for you.” This is a much lower standard than being a fiduciary, which demands that the advisor place his clients’ interests ahead of his own. This may not look like much of a difference, but it’s huge.
According to a Market Watch article, “here’s a typical example: Suppose an advisor can either sell a high-commission product or recommend a no-commission fund, both of which are suitable for the client. The fiduciary advisor will always choose the no-commission fund, because he always puts the client’s interests ahead of his own. But the non-fiduciary advisor could go either way because both products are suitable. Of course, the client will probably be worse off if the advisor selects the high-commission product, since the added costs — often in the 3%-6% range — tend to reduce total investment returns.
Think of it: You invest $1 million, your advisor makes $60,000 in an instant (based on a 6% commission), and you’re worse off. Yet his conduct is just fine under the suitability standard since the investment was suitable for you.”
That’s why you should always invest your hard-earned money with an advisor who operates according to a fiduciary standard. Your interests should always come first.
We are constantly counseling clients who have made a similar mistake, and working with them to remedy it to improve their situation. It is estimated that conflicts of interest like the above example cost investors $17 Billion per year.
Getting back to the government, there is a move under way by the Department of Labor (DOL) to require the Fiduciary Standard of anyone giving advice on a retirement plan. Most people are truly incredulous this isn’t already a requirement, but it’s not. Needless to say the financial services industry is in an uproar over it, and fighting tooth and nail to stop this.
Some insurance companies are threatening to get out of the annuity business, and one already has announced it is doing so. Not only is the industry against it, as reported by Reuters, believe it or not the “U.S. Chamber of Commerce is ready to sue over the retirement adviser rule” (fiduciary requirement).
U.S. News & World Report reports some don’t believe the fiduciary rule goes far enough: “Susan Fulton, founder of FBB Capital Partners in Bethesda, Maryland, says broker commissions, and human nature itself, impede transparency under the suitability model. Like many other RIA founders, she left the broker-dealer world to become a fiduciary, establishing her firm in 1989 before the RIA model was well known. She says there are too many inherent conflicts left unaddressed by the suitability standard.”
As a consumer, what should you do? It is our belief the all advisors should be fiduciaries. The client should always come first. So do some homework either on your current advisor, or someone you’re considering (or both). Here are some pointers from MarketWatch:
- Ask your advisor: “Do you always act according to a fiduciary standard? Are you legally bound to act in my best interest?”
- Look at the advisor’s documents: Is the advisor’s adherence to a fiduciary standard clearly stated in writing?
- Look at your account statements: Make sure you are not invested in proprietary funds (created or sponsored by the advisor’s firm) or products that charge commissions when your objective could be just as effectively met by non-commission funds.
When searching, we recommend considering someone from the Garrett Planning Network. The founder of the Garrett Planning Network, Sheryl Garrett, was recently quoted in an Investor’s Business Daily article, “How To Pick The Best Financial Advisor To Plan For Retirement.”
“Because everyone faces unique circumstances, Garrett argues that an advisor who excels in serving one type of client may not prove equally great for another client. It’s better to vet candidates by focusing on their credentials and retirement planning expertise.
Advisors with a certified financial planner (CFP) designation have undergone “a rigorous training and education process,” Garrett says. Other professional certifications, such as chartered retirement planning counselor (CRPC) and certified retirement counselor (CRC), further indicate an advisor’s commitment to understanding the complexities of retirement planning.
When evaluating an advisor’s ability to help pave the way for your retirement, take a holistic view. Look beyond your projected investment returns.
“Think in terms of your lifestyle, not just your retirement nest egg,” Garrett said. “You need someone who knows about all aspects of retirement life, from issues tied to aging to health care to home renovations if your mobility is challenged.”
Be careful out there, and we can help at Financial Freedom Planners!