Why work with a fiduciary for your financial plan.
You may have heard or read a lot about fiduciary standards lately. The increase in interest comes as the U.S. government proposes tougher rules for financial representatives to follow when making investment recommendations, ensuring that investors’ best interests are served first and foremost.
On the face of it, any debate about this proposal seems absurd—why wouldn’t a professional who’s in business to offer a service to clients strive to work only in their clients’ best interest? But in the financial industry, bias and conflicts of interest have long been commonplace as firms seek efficient ways to raise assets and grow revenue. So it’s no surprise to hear these interested parties have the loudest voices in any debate to define who is a fiduciary and what fiduciary duties entail.
What is a fiduciary? A fiduciary is someone you hire to serve and advise your interests in important matters. Think of how you work with your doctor or your lawyer. Both provide personalized and confidential guidance for complex and often critical decisions. And they are both bound by the standards of their professions to serve only in your best interests, not putting their own goals or their firms’ goals ahead of your own.
An investment advisor acts in a similar capacity. Registered investment advisors are required to act as fiduciaries for clients and are bound by a commitment to align their interests with the financial interests of their clients. In contrast, brokers only have to meet a lower standard for “suitability”. While brokers are expected to deal fairly with their customers and required to know their financial situation well enough to recommend suitable investments, they are not held to the fiduciary standard.
Investors may often pay a steep price for the lack of fiduciary responsibility among brokers, in the form of higher costs on their investments. These higher costs often go toward commissions and fees paid by the investment manager to the broker as an incentive for selling their products.
When there’s an alternate incentive for making an investment recommendation, the door opens to potential conflicts of interest that could adversely impact the success of clients’ financial plans.
The investment advisor community has long recognized clients expect their financial representatives to serve their best interests. The government doesn’t have to mandate it when the marketplace demands it.
So it’s likely we will see broader fiduciary standards come to the financial industry. Still, these standards will not resolve the many issues investors face. Fulfilling the duties of a fiduciary is not the be-all-and-end-all for financial representatives. If anything, these responsibilities should come first, as they do when you work with a registered investment advisor.
If you care deeply about your future—and not just the financial aspects of it—it helps to have an advocate who will align with your interests and work to fulfill your needs first. That’s why it’s important to choose an investment advisor for your financial plan.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.