By Todd Moerman
Learn more about Todd on NerdWallet’s Ask an Advisor
Is the first obligation of your advisor to you (the client) or to the advisor’s firm and himself/herself? This distinction is the foundation of your relationship with your advisor and should be the first decision you make with your money. Advisors are officially registered in their practice as providing either:
1) “Fiduciary standard of care”;
2) “Suitability standard of care”;
3) BOTH fiduciary and suitability standards of care.
According to J.D. Power and Associates, 85% of investors don’t understand the difference between suitability standard and fiduciary standard. This is a costly mistake.
This is exactly what Wall Street wants! They want to blur the lines between true fiduciaries and non-fiduciaries because non-fiduciaries can make significantly more money off clients… they can collect commissions, sales loads, 12b-1 fees and other fees. Look at the ads and marketing… non-fiduciaries try to SOUND like a fiduciary. They ads say, “trust us”, “we put clients first”, “dedicated to you” and “we are on your side.” Let’s look at the facts and find out where the rubber meets the road.
Suitability standard of care:
- Detailed in the Maloney Act of 1938 and regulated by FINRA.
- Non-fiduciaries need only offer investments and products that are “suitable” for clients but not necessarily in their best interest.
- Does not require that the advisor disclose how they are compensated, if there are conflicts of interest or hidden costs involved.
- Non-fiduciaries are allowed to make self-serving recommendations as long as they are suitable for the investor.
- Non-fiduciaries are salespeople who make a living selling investments. Any advice they provide is merely incidental to the sale of the investments. Brokers and insurance agents fall into this category.
Fiduciary standard of care:
- Detailed in the Investment Advisors Act of 1940 and regulated by the SEC.
- Fee-only Registered Investment Advisor (no commissions, no loads, clear transparency)
- Required by law to act in a fiduciary capacity at all times.
- The client’s interests must always be put ahead of the interests of the individual advisor or firm.
- Transparent and full disclosure about how compensation is paid.
- Must disclose all potential conflicts of interest.
- Get the fiduciary oath in writing from your advisor. Find out more here.
It is OK to trust your advisor but verify you have a fiduciary standard of care on your side!
Many advisors are good people, with noble intentions, and care about their clients. However, most are in a business model design that is NOT required to put the client first. Verify you have a “fiduciary standard of care” on your side.
Do not accept your advisor to be “fee-based” (NOT the same as fee-only). Do not accept dually registered advisors (those with both fiduciary and non-fiduciary standards of care). Dual registration means sometimes the advisor is obligated to do what’s best for the client, sometimes he/she is not. You deserve an advisor who, by law, will put your interests first. Transparency matters. You deserve a fee-only, fiduciary 100% of the time.
Note for Advisors: If you are a great non-fiduciary advisor who truly puts clients first, now may be the time to find a firm that will adhere to the fiduciary standard 100% of the time for all of their clients. Many of you want this for your clients, so don’t let your firm hold you back.
We suggest you get a free 2nd opinion about your current financial strategy and investments. Contact us for more details. Integrity Investment Advisors, LLC is a fee-only independent Registered Investment Advisory Firm. We are headquartered in Fort Collins, Colorado and serve clients on a national basis. If you know anyone who may benefit from our services, please contact us. 2013 Press Release: Integrity Investment Advisors, LLC and Managing Partner Todd Moerman are pleased to have recently joined an exclusive group of wealth managers offering the low cost mutual funds of Dimensional Fund Advisors (DFA) to its clients. Find out why DFA may be a better solution than Vanguard or American Funds. Contact us at firstname.lastname@example.org Twitter@ToddMoerman