The Fiduciary Standard and What It Means to You
By: Benjamin Yeung, Associate Financial Advisor
When looking for help from experts in the financial world, a common concern is how to choose who to trust. Financial professionals are governed by guidelines to ensure that they do not take advantage of their privileged position. These guidelines are codified under a “standard of care.”
There are two very distinct standards of care for financial professionals: the fiduciary standard and the suitability standard. In short, the suitability standard can be met by showing that a recommendation meets a client’s objectives, time horizon, and experience. This is the standard required of most company financial representatives, including stock brokers and insurance agents. Registered investment advisors and trustees are held to a fiduciary standard, which mandates that they place the client’s interests first.
What’s the difference? What does this mean for you?
The problem with the suitability standard is that the agent does not even need to try to find the best solution. An extreme example: if there are two share classes of the same mutual fund with different fee structures, a broker is not obligated to recommend the less costly one, or even disclose its existence. Enter the fiduciary standard. In essence, the fiduciary standard requires that the advisor attempt to give recommendations that would match what they would do in the client’s place. As a fiduciary, the advisor would be required to disclose the existence of the least expensive available share class and recommend it to the client even if they did not ask about it.
How do you know which standard an advisor follows?
You can always ask. A professional should know whether they are held to the fiduciary standard, and if you ask them, they should tell you. However, a more important question isn’t whether they are held to a certain standard by some regulation; after all, in order to get compensated for a breach of standard, you’d need to go to a lot of trouble. There are many great agents motivated only by their clients’ best interests, and there are fiduciaries that fail to meet their ethical obligations.
The follow-up question is: What are some signs that an advisor wants to act in your best interest?
They are transparent. Acting in your best interests means that they should want you to be properly informed of relevant facts and potential conflicts of interest. If you're not sure about something, they should be eager to clarify it for you when you ask. They should be equally comfortable talking about good news and bad news.
They want to know you. In order to give recommendations that work for your best interests, they need to understand some of what motivates you to make the choices you do. Their knowledge makes them well versed in many financial tools, but only you know what life you want to build with those tools. In order to align your financial plans with your lifestyle, they need to understand much more about you than your brokerage statements.
They are seeking a match, not a sale. Advisors are still people; they have different personalities, temperaments, and professional strengths. Your relationship with your advisor should be a flexible, robust, evolving collaboration. It represents an investment of time, attention, and care from all parties. Therefore, a true fiduciary should be as focused on making sure you are right for them as the other way around.
Those are just a few general signs; you may find others which are relevant to your particular needs and goals. What’s important to keep in mind is that your advisor will ideally be a lifelong source of financial expertise and coaching. They will be able to help balance the conflicting priorities of your life by helping focus on the most relevant facts in the vast and ever-changing financial landscape of modern society. Finding an advisor you trust to work with you during that journey will have a big impact on your security and enjoyment along the way.
IMPORTANT DISCLOSURE INFORMATION
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