In the US, we embrace the idea that professional service providers are required to act in our best interest. We expect this behavior from our doctors and lawyers who face stiff fines or suspension for failing to abide by professional standards. In the financial services industry, it’s not that clear, and there are two legal standards.
First, is the fiduciary standard where the provider acts in your best interest. Second, is the suitability standard where the providers offer solutions, but where they can put their compensation and firm first.
There was a hot debate in the financial service industry about adopting the Department of Labor (DOL) Fiduciary Rule. In August, the U.S. Fifth Circuit Court of Appeals confirmed its decision to vacate the rule, leaving the rule with no legal status. The rule had been stalled by the Trump Administration’s need to investigate its effects on business. Those against the bill said implementation of a fiduciary standard for ERISA providers would end access to financial advice for retirement savers of modest means. However, proponents argued that the rule was a necessary safeguard to those same investors.
On the surface fiduciary and suitability standards differences may seem subtle well, they aren’t and the differences can end up costing you real money. We suggest it is important to do your homework and understand if your financial advisor is required to put your interest first (fiduciary) or if they can operate with conflicts and put their firm and compensation first (suitability).
Knowing the answers to the following questions will help you understand if your advisor is a fiduciary or operates with the suitability standard. If you are in the process of hiring an advisor, ask for the responses in writing.
Ask an advisor these questions and consider getting the answers in written form:
1)What is your firm's legal structure?
Advisors under a Registered Investment Advisor firm (RIA) serve in a fiduciary capacity. Some advisors call themselves a “hybrid”. In this case they could be speaking about being a registered rep with a broker/dealer and an investment advisor representative with an RIA. If they are a hybrid, ask what that means for your relationship.
2)How are you registered and what professional designations do you hold?
Registered Investment Advisor (RIA) firms and their Investment Advisory reps (IAR) are required to serve as fiduciaries. Registered Representatives or brokers (like those at Morgan Stanley or Merrill Lynch) and Account Representatives (like those at Fidelity and Schwab) are only required to meet the suitability standard when selling financial and investment products.
3)How are you compensated for selling financial products or services you provide?
If advisors receive commissions or compensation for selling certain funds, annuities or products, they are acting as a broker. RIA advisors generally charge an advisory fee based on assets under management. Ask about compensation. are the fees for advisory services or the personal compensation embedded in the products they sell?
4)Have you or your firm been cited for disciplinary reasons?
Look in BrokerCheck to see if complaints have been filed against the individual or firm. Current or past conflicts could mean that they are not living up to the proper standards.
In August 2018, the burden to protect your retirement assets from bad agents was put back on you. You do have options for gaining a fiduciary’s help and oversight. Consider working with an RIA firm as your provider. Or hire a delegated provider who stands with you as a fiduciary.
Ultimately investing and governing your assets like an institution is ideal. Need to understand your situation better? The team at Laurentide would be happy to meet with you.
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John Kirby is a Principal and Co-founder of Laurentide Advisory