You should. I should. We all should. But, why? At a time when investors do not fully understand the difference between an investment advisor, a financial planner, or even a stock broker, how can we expect them to see the value in the fiduciary standard? It is not because they do not care. Point of fact, many people want to trust their advisor, but what benchmark of care are they supposed to use to determine their care? Doctors have the Hippocratic Oath. Lawyers have their own oath. What do financial professionals have? That depends on who they work for, and how they conduct business.
Benchmarking a Standard
Stop and ask yourself "What information do I guard from others?" I am sure the list might surprise you, but I would bet money is at the top of the list. Money is so important to people that it ranks in the top three reasons for divorce, one of the top reasons for identity theft, and is widely viewed as a status symbol amongst friends, family, and co-workers. So what standard of care do you place on your money? We employ banks to protect our money, and we rely on technology to alert us to the threat of theft, but how do we gauge the financial advice we receive?
Before 2016 organizations like FINRA, SEC, and the State Commission outlined rules for engagement when working with clients. If an investment advisor, or financial planner, operated in a broker dealer capacity they were bound by a suitability standard. If investment advisor, or financial planner, operated in an investment advisory capacity they were bound by a fiduciary standard. However, what about the broker who invests your money into a managed advisory account? Are they under the suitability or the fiduciary standard?
In April of 2016 the Department of Labor (DOL) came out with a ruling specifically detailing a standard of care for every investor, regardless of who an advisor works for or how they work with clients. Commonly known now as the "Fiduciary Rule", the DOL outlined very specific requirements for how advisors should engage their clients when discussing anything to do with retirement accounts (i.e. 401ks, IRAs, pensions, etc.). Surprisingly though, the rule did not extend to "non-retirement" accounts. In short, the rule requires anyone providing advice on retirement accounts to operate in a fiduciary capacity. In other words, they are required to put the interests of the account holder above that of the financial professional. Seems pretty simple? Maybe even a "no-brainer".
Then why did it take a regulatory body to tell investment advisors, brokers, insurance agents, and other financial professionals how to treat their clients? The answer: They needed something to benchmark a standard for financial professionals.
Suitability vs. Fiduciary
I have been asked a few times, what is the difference between the two classifications? Let me try to explain the rule through an analogy (I am an anecdotal person). Imagine you just woke up, got ready for the day, and headed in to the office. Today traffic was a little heavier than normal which made you skip your morning breakfast routine. Upon arrival at the office you realize you are pretty thirsty after your long morning commute. In the lobby of your office is a snack cart that sells coffee and water. The coffee is a dollar and the water is ten cents. As you stand in line you debate how thirsty you are and think about what your morning is going to look like. You contemplate whether you will need a "pick-me-up" to get through the morning board meeting. As you reach the counter the guy asks you what you want and you respond with "I don't know, I am here because...and I am looking for...".
Of course the guy has been through this dazed look before so he starts to spout off some options with some technical jargon about the different type of coffees, where they were brewed, and eventually ends with "Oh and we have water too". If he can make the persuasive argument to convince you that coffee is a better option as compared to water for 10 times the cost of water, AND your primary requirements were thirst and a possible "pick-me-up", then coffee is a suitable suggestion.
Now reflect on this transaction from an outsider's perspective. Coffee tastes different than water, has short term perks (primarily due to the caffeine), does not rehydrate you, and ultimately still leaves you feeling thirsty. If the cart attendant bothered to ask you questions about your upcoming day, whether you were an avid coffee drinker, or even about why you stopped at his cart in the first place, he may have uncovered more information which could have resulted in choosing water over coffee. Was the higher commission of coffee over water driving his recommendation? Did he put your interest above his own? Had he dug deeper in a fiduciary capacity, he may have recommended five cups of water at half the cost that would have carried you through lunch, versus the one cup of coffee (which you would have finished by the end of the board meeting). Therein lies the true challenge of making a suitable vs. fiduciary investment recommendation. The depth and breadth of the questions asked during a financial meeting highlight the client's best interests above that of the professional's.
I recently tried to describe this to a few clients and many of the responses I received were of confusion and bafflement. Questions like "Why is this rule just coming out now?" or "Why is it not common for all financial service professionals to act as a fiduciary?". They were right, why does it take a law to tell financial professionals how to act? Without trust, integrity, and transparency the relationship between a financial planner, investment advisor, or insurance agent and their client will always struggle and eventually leave an unpleasant taste in the client's mouth.
**The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendations for any individual.