The Fiduciary Standard: No Ifs, Ands or Suitable Buts
In a previous post, A Word (or Few) About Fee-Only Financial Firms, we talked about how being a fee-only advisor may make our costs more obvious, but we do it anyway, because we believe that clarity is key to an investor’s success.
Right after you ensure that your advisor is fee-only, the next question to ask is whether he or she will be in a fiduciary relationship with you – proudly, absolutely, and in writing.
What a Fiduciary Does, and Why It Matters
Why does this matter? As a fiduciary, your advisor has a clearly defined legal obligation to always and exclusively act in your highest interests, even ahead of his or her own. To further support our fiduciary role, we are established as a Registered Investment Advisor firm, which, as the name implies, establishes objective investment advice as our reason for being.
This is in stark contrast to the traditional and, alas, familiar model of commission-based brokers, bankers or agents who operate under the suitability standard instead of as fiduciaries. These individuals may “advise” you to trade in “suitable” products that they have for sale, but their business priorities, legal loyalties and sources of compensation are found elsewhere.
Their primary stock in trade (no pun intended) is to place trades for you, first, and only secondarily offer you advice along the way.
The Difference Between the Fiduciary Standard, and Those Who Work Without It
In the recent New York Times piece, “Before the Advice, Check Out the Advisor,” fiduciary standard champion Knut Rostad explains the caveat emptor for investors who accept suitable advice: “While many brokers do right by their clients, others push bad products at high prices. … They do so because their culture celebrates sales. They do so because they can.”
Barry Ritholtz also does a fantastic, no-holds-barred job of explaining the differences between fiduciary and suitable advice in his October 2014 Washington Post column, “Find a financial adviser who will put your interests first”:
“The simplest way to describe this [suitability] standard is ‘Don’t sell AliBaba IPO to Grandma.’ In other words, all that matters is the investor is ‘suitable’ for a particular product. … The bottom line is that the client’s best interest is not part of the equation.”
Bottom-line, if you are not working with a fiduciary advisor, your highest interests can legally take a back seat to other players’ unknown sales quotas and conflicting incentives. That’s why a legal term like fiduciary standard matters so much.