The first phase of the Department of Labor’s “Fiduciary Rule” goes into effect today. This topic has been in the news a lot lately, so you probably have some idea that your financial advisor should be a fiduciary. The author of this Forbes article thinks that regardless of the rule’s legal future, consumers will hold their financial advisors to it, and I agree. You have been enlightened, and now I hope you will accept nothing less than your best interests as top priority. You already demand this level of care from your doctor and accountant so when your life savings are at stake, you should absolutely expect the same standard of care and ethical duty.
But what does it mean exactly, to be a fiduciary? And what does it mean for you if yours isn’t?
Essentially, a fiduciary is an financial advisor who is required by law to act in the best interests of the client. But there’s more to being a fiduciary than meets the eye. It’s not just a label you can slap on. Only one kind of financial advisor – one who acts exclusively as a Registered Investment Advisor or “RIA” – is required to act as a fiduciary at all times. That little three letter word “all” is really important.
It is possible, and increasingly popular, for financial advisors to be dually registered, meaning sometimes they wear a fiduciary hat to provide investment advice while at other times not; getting commissions through an affiliated broker-dealer on other investments. So the question to be asking is not, “Are you a fiduciary?” but rather “Are you required to act as a fiduciary at all times?”
These dually registered advisors are blurring the distinction between broker and advisor, which can be confusing to investors. Other key differences between these two approaches include the following:
The fiduciary standard goes beyond the traditional requirement that broker-dealers “reasonably believe” the recommended investments to be “suitable” for the client, based upon their needs, objectives and circumstances. The broker’s duty also remains to the broker-dealer by whom she is employed, not necessarily to the client. To make matters worse, many of these broker-dealers are publicly traded companies which means their duty remains to the shareholders. The fiduciary standard requires RIAs to maintain a “duty of loyalty and care” to their clients, which means the advisor is required to be on your side, regardless of whether it makes her, or her employer, more money.
The essential difference between the suitability and fiduciary models is their primary focus: a product vs. client orientation. The licensing requirements for these two professions back this up. A broker is trained and licensed primarily to be a salesperson and has a Series 7 license to sell a product. An RIA, however, maintains a Series 65 license to provide investment advice.
I can hear you protesting as I type these words - “But my Financial Advisor is a great guy!” or “We’ve been with XYZ Brokerage forever… of course they’re looking out for us!” I am not saying your Financial Advisor isn’t a great guy, or that you haven’t had good service from your brokerage. But the bottom line is that under the fiduciary standard, an advisor working with an RIA would be prohibited from putting your money in an investment from which she would receive a higher fee because it would cost *you* more money. The great guy at your brokerage would not, as long as that was one of many investments deemed suitable for your situation. In fact, a broker might even be incentivized to invest you in his brokerage’s products because he earns a higher commission on them, regardless of whether they are the best choice for you.
Another byproduct of the sales or transactional orientation of most brokers is that once the sale is completed and they’ve received their commission, you may not hear much from them. We often hear people say they “feel like a number” or don’t hear from their financial advisor regularly which makes sense when you think about it - if they’ve already received their compensation and are not bound by a fiduciary duty to keep working in your best interests, why would they call more than they need to? Unless you’re an investor with a lot of assets, it is not cost effective for them to spend time on you. This is often true for many RIAs, as well, because they tend to be paid a fixed percentage of the invested amount. This is why many investment management firms have minimum account sizes that exclude less profitable clients.
Which brings us to another problem in the scope of advisor compensation: in a compensation structure where everyone is moving to fee-only, and those fees are required to be “reasonable,” who is the arbiter of reasonableness? If everyone is charging around the industry average of 1.00% - 1.25% of assets under management – and we may see that increase as advisors seek to make up for lost commissions – investors don’t have many better options. So even fiduciary RIAs and dually registered brokers can legally meet the definition of fiduciary, but still charge what we believe are excessive investment management fees. And in the end, you, the client still pay a steep price.
At Action Point, we do things differently. We are all fiduciaries, all the time. That means we serve your best interests above our own. That means a transparent, and much lower than industry average fee structure with no commissions on investments, ever. We believe that talk is cheap. So this is our way of adding real value (plus we can sleep at night which is an added bonus.)
We don’t believe in minimums either. We currently help investors that range in size from just getting started to tens of millions. If you’ve got a little to invest, we want to steer you in the right direction. If you’ve got a lot, we want to help you avoid expensive mistakes. We want to help you enjoy your life and save responsibly for the future.