Much has been written of late about the issue of Financial Advisors as fiduciaries. There are a number of initiatives in Congress. One would force commissioned reps such as stock brokers to adhere to the same standards as Financial Advisors.
I am not an attorney, but let me throw out the following as a working definition of a Fiduciary:
fi•du•ci•ar•y – A financial advisor held to a Fiduciary Standard occupies a position of special trust and confidence when working with a client. As a Fiduciary, the financial advisor is required to act with undivided loyalty to the client. This includes disclosure of how the financial advisor is to be compensated and any corresponding conflicts of interest.
This is the definition of Fiduciary used by NAPFA (National Association of Personal Financial Advisors) the largest professional organization of fee-only financial advisors in the United States.
Why should you care if your financial advisor is a fiduciary?
Currently brokers are regulated by FINRA, who requires them to make recommendations that are suitable for their clients. I’ve never come across a good definition of what suitable really means. One definition I found on the website of Clausen Miller a law firm with offices in major U.S. and international cities:
The suitability rule provides that when a financial representative recommends to an investor the purchase, sale or exchange of any security, a financial representative shall have reasonable grounds for believing that the recommendation is suitable for such investor upon the basis of the facts, if any, disclosed by such investor as to his or her other security holdings and as to his or her financial situation and needs.
This really doesn’t specify anything about loyalty to the client, disclosure or anything else. The word reasonable is quite vague. In fact I would contend that many brokers/registered reps may be more concerned with the compensation offered by the sale of a particular financial product than with looking at the client’s overall financial situation and making recommendations to help that client reach their financial goals.
This brings me to the reason that clients should care if their financial advisor is a fiduciary. As a client I would want to know that my financial advisor is taking my best interests to heart, that he or she is making recommendations to me that are in my best interest. As I understand the current rules, brokers, registered reps, insurance and annuity sales people have no such obligation to their clients. Many are sales people trying to place a financial product.
Several years ago Charles Schwab ran an ad depicting a brokerage office pushing the stock of the day and used the phrase “…let’s put lipstick on this pig…” While humorous (and perhaps exaggerated) I fear that it does reflect the mentality of many product pushing sales people calling themselves financial advisors.
The worst part of all of this is that the public doesn’t really understand it all. Many who are regulated by the Suitability rules are competent and concerned with the welfare of their clients. They make recommendations that are in line with the interests of the client. Unfortunately there are others who don’t and are not required to under the vagaries of the Suitability rules.
It is my hope that Congress will enact a Fiduciary Standard for all who call themselves Financial Advisors that is clear to the public and defines the duties of an advisor with regard to putting the client first.
Please feel free to contact me with your financial planning questions. I am a member of NAPFA who adheres to the organization’s fiduciary standard.
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