Here’s a fact about financial advisors (NOT Investment Advisors) that may surprise you: they do not necessarily have to act with your best interests in mind. Please, take a moment to shake your head in disbelief. It’s ok.
Actually, it’s not ok! The way the law exists today, advisors and brokers can be classified in one of two ways. Either they give you investment advice according to the fiduciary standard, or they adhere to what's known as the suitability standard. It’s the latter one that can be problematic, and it’s also the growing subject of legal debate as the White House and Department of Labor consider new rules. Below, we broke down what you need to know now and what to look for ahead.
What’s the Difference Between the Fiduciary Standard and the Suitability Standard?
The fiduciary standard is straightforward and states that the investment advisor’s highest priority must be to make recommendations with a client's best interests in mind. This way of giving advice and doing business implies a duty of loyalty in which the fiduciary investment advisor sits on the same side of the table as the client and acts as though they are in the client’s shoes.
The alternative to the fiduciary standard is the suitability standard, under which a financial advisor need only ensure that the recommended investment is "suitable" for their clients. Consequently, this standard allows advisors and brokers to recommend proprietary or other investments that could provide the advisor significant compensation (commissions), so long as the investment is compatible with the client's goals and objectives.
It’s a puzzling distinction, since it would seem natural that all retirees and investors should receive advice with their best interests at heart. But, for now, the rules state otherwise and according to one study, the effects can be quite tangible: conflicted advice (provided by those adhering only to the suitability standard) can lead to lower investment returns of 1% per year, and unnecessary costs of about $17 billion.2
New Regulations Could Change the Way You Receive Advice
The rules may change soon. In late February 2015, the White House asked the Department of Labor to consider new regulations that would require fiduciary standards across the board for advisors and brokers who work with retirement accounts.1 These regulations could potentially eliminate conflicts of interest and “ulterior motives” that sometimes surface under the suitability standard.
Don’t Wait for the Rules to Change! Work with a Fiduciary Investment Advisor
Adhering to the fiduciary standard gives an investment advisor the characteristic clients desire most – trustworthiness. Without the fiduciary standard, there’s no way to know if an advisor is really acting in your best interest, or if there are other factors in play.
So, don’t wait for the rules to change. We encourage you to ask your financial advisor the simple question: do you adhere to the fiduciary standard or the suitability standard? If you don’t get the answer you’re looking for, you might have some bigger questions to ask.
Our Wealth Managers would be happy to discuss the fiduciary standard with you. Give us a call at 1-800-541-7774 or contact us here.
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Sources:
1. CBS