Understanding the fiduciary standard.
In a 2017 survey by The American College of Financial Services, only 52 percent of respondents currently working with a financial advisor were certain whether their financial advisor was a fiduciary or not.
This little understood standard of care should be a sizeable factor in determining whether working with a particular advisor is right for you and your goals, yet a whopping 48% of those respondents didn’t know the standard of care to which their advisor is held.
So, what is the fiduciary standard and why does it matter?
The fiduciary standard is an SEC regulated standard of care that requires Registered Investment Advisors to act in the best interests of their clients and to put the needs of their clients above their own.
This legal and ethical obligation to put the client first sounds like your typical regulatory oversight that can be found in almost any industry. However, the vast majority of ‘money managers’, ‘financial advisors’, and ‘brokers’ in the United States are not held to this standard.
In fact, most financial advisory firms are held to a lower standard of care. The suitability standard.
The suitability standard is rife with grey areas which allow advisors and brokers to put your money into products, plans, and models which first and foremost benefit them. Large built-in commissions, and models dictated to them by their firm can mean that your assets are not always allocated with your goals in mind.
It may come as a shock to many individuals and families to learn that their advisor is not obligated to put their needs above their own.
How do I ensure that my advisor is doing what is best for me?
First and foremost, it is important to ascertain whether your advisor is a fiduciary. This will give you the most definitive understanding of the standards to which they adhere.
Second, understand that there are many good advisors out there, both brokers and fiduciaries. However, do look for designations that show competence and a dedication to excellence within the industry. Designations such as the CERTIFIED FINANCIAL PLANNERTM professional (CFP®) can build confidence in the competency of your advisor.
Third, look at performance and go with your gut. Are you happy with the performance of your portfolios? Are you comfortable with the amount of risk in your portfolios? Do you feel good about the attention and care you receive from your advisor? If the answer to any of these questions is no, it may be time to schedule a consultation with another firm.