Bear with me, this is a lengthy discussion. But one that is essential reading!
A Financial Planner held to a Fiduciary Standard occupies a position of special trust and confidence when working with a client. As a fiduciary, the Financial Planner is required to act with undivided loyalty to the client. This includes disclosure of how the Financial Planner is to be compensated and any corresponding conflicts of interest (source www.FocusOnFiduciary.com).
If you haven’t heard of a Fiduciary Standard of Care, you haven’t done your homework on selecting your financial planner. The single most important thing your doctor, your lawyer, and your accountant (your accountant has an implied Fiduciary Standard) have that 99% of all financial advisors DO NOT have is the Fiduciary responsibility to you, their client. Every financial planner should be held to a Fiduciary Standard, but 99% of them will not put it in writing, legally binding them to that extra level of care and responsibility.
So just what is a Fiduciary Standard? A Fiduciary Standard is the absolute and undeniable obligation to provide you (the client) the most appropriate financial advice and guidance REGARDLESS of personal gain (compensation/commission/fees/perks, etc.). A Fiduciary Standard entails acting with complete disregard as to how the recommendations and planning advice will affect the planner, but rather how those recommendations and the planning advice will benefit the client financially and accomplish the clients financial goals. A Fiduciary Standard requires a complete and consistent focus on the client from the beginning stages of the financial planning and investment process, through the execution, implementation, and monitoring of the clients financial plan.
What would you think, how would you feel if you went to your doctor with a life threatening condition and they weren’t held to a Fiduciary Standard of Care? What if they received compensation or perks for recommending one drug over another? What if their income was dependent on which drugs or course of treatments they recommended? What if they needed to sell “X” amount of “ABC” drug and the generic counterpart never entered their mind?
You’d feel betrayed, you’d feel distrust, you’d think your doctor didn’t have your best interests at heart, you’d be hesitant and concerned as to where to find real honest medical advice. You’d have every right to feel that way.
Attorney’s have a similar Fiduciary responsibility to their clients. An attorney must act with good faith and in their clients best interests always. The client is trusting the attorney to represent them in the most prudent manner possible, and the attorney must not breach this confidence placed in them by their client.
Yet everyday the average consumer with financial and investment needs signs over their financial security and future to an individual not held to a Fiduciary Standard of Care. Every day the average consumer continues to re-hire that same NON-Fiduciary financial advisor - because not firing a non-Fiduciary advisor is the exact same as re-hiring that person everyday that passes. Every day millions of investors naively but trustingly believe they’ve received the most prudent and unbiased advice possible, when this isn’t necessarily the case.
Your doctor is held to a Fiduciary Standard of care, your attorney is held to a Fiduciary Standard of Care, and your accountant by implication is generally held to a Fiduciary Standard of Care.
Why would anyone accept anything less than a complete acceptance of the Fiduciary Standard on the part of their financial advisor? Simple - 99% of financial advisor “professionals” choose not to (or cannot) adhere legally (or philosophically) to a true Fiduciary Standard. They’re enriched by large commissions, perks and other hidden fees to sell products rather than solve problems. Their incentive is lining their own pockets, not helping you achieve your financial and retirement goals. These financial advisors are paid from the Wall Street firms or insurance companies they work for, not their clients.
Most consumers assume the Fiduciary level of responsibility and duty is already present in the financial services industry, and they’d be right to a limited extent. The Investment Advisors Act of 1940 mandates that to offer financial advice one must be a Fiduciary. To avoid this higher standard of care and responsibility the securities industry created what was coined the “Merrill Lynch Rule”, exempting certain types of fee-based accounts from coverage under the Investment Advisors Act of 1940 (labeling them brokerage accounts rather than advisory accounts).
The Merrill Lynch Rule was overturned in May of 2007 thanks in part to the Financial Planning Association’s legal efforts. Wall Street does NOT want the imposition of a Fiduciary Standard because it clearly opens them up to more regulation and lawsuits from many standpoints, including a breach of fiduciary responsibility and suitability. But the simple fact remains that a Fiduciary Standard protects you, the consumer of financial and investment services.
Although the Merrill Lynch rule was overturned, there still today does not exist any reasonable or consistent set of Fiduciary Standards in the financial planning and investment management industry. The primary reason this issue is so challenging for the industry to manage is compensation. If a financial advisor is paid directly from the client (or the financial advisor’s only source of income is through fees from the client in some form), they can in theory embrace a Fiduciary Standard. However, if a financial advisor is paid by some Wall Street investment banking firm or insurance company - their responsibility is to their employer who signs their paycheck first!
If you believe that extra level of care and responsibility should be present in your financial advisor, demand clearly and in writing from them that they agree to be held to a Fiduciary Standard as described under the Investment Advisors Act of 1940. Demand they put your best interests first. Demand they provide you exceptional and unbiased financial and investment advice.
A Fiduciary Standard is the highest standard of care, duty and responsibility in a relationship. Anything less than a Fiduciary Standard of care from your financial planner is unacceptable. This is your financial future, your nest egg, your retirement, your family, and your security we’re talking about…right? Isn’t it time you expected more from your financial planner?
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