Why Select a Financial Fiduciary?
A fiduciary is a person who holds a position of trust and who holds a bigger position of trust than a person who influences or controls the investment of your retirement assets?
In the financial service industry there are non-fiduciaries and fiduciaries. The difference between the two may determine when you retire, how you live during retirement, and your financial security late in life. Again, what is more important than the achievement of these financial goals?
There are two ethical standards in the financial service industry:
- Financial fiduciary is the highest ethical standard. Investor interests always have to come first.
- Suitability is a vague, lower standard. Investor interests do not have to come first.
Wall Street has deliberately blurred the distinction between fiduciaries and non-fiduciaries. It knows investors would always select fiduciaries if they knew the critical difference. This would damage Wall Street that employs or licenses hundreds of thousands of sales reps who are non-fiduciaries.
Sales reps are allowed to make investment recommendations when they sell investment products. Financial advisors are allowed to provide financial advice when they sell investment services.
Do you know the critical differences between recommendations and advice? How about the differences between products and services? That’s all right, no one does. Blurring these distinctions is one of Wall Street’s biggest tricks. Advisors and reps should be held to the same ethical standard. However, Wall Street is spending millions to stop a regulation that would benefit investors and damage its revenue and profits. This major conflict of interest is not going away.
Sales reps are held to the vague, lower ethical standard of suitability.
They are supposed to make suitable investment recommendations based on their knowledge of the investor’s needs, concerns, goals, circumstances, and tolerance for risk. Therefore, suitability varies by investor, which makes it next to impossible to enforce. Wall Street makes more money when standards are vague and difficult to enforce.
Registered Investment Advisors (RIAs)
RIAs are held to a fiduciary standard when they provide financial advice and ongoing services. This is the highest standard in the financial service industry. An RIA can be a firm or a professional who is a sole proprietor.
Investment Advisor Representatives (IARs)
IARs are also held to a fiduciary standard when they provide financial advice and ongoing services. This is the same high standard that applies to RIAs. IARs are registered with RIAs.
There are advisors who hold securities licenses so they can sell investment products for commissions. They are also IARs who can provide financial advice for fees. They are non-fiduciaries when they sell products for commission. They are fiduciaries when they provide advice for fees.
You have to cautious when you follow the advice of hybrids. They may or may not be fiduciaries. Their method of compensation is the easiest way to tell the difference. If they are paid commissions they are non-fiduciaries. If they are paid fees they are fiduciaries.
Make sure you select a financial fiduciary to be your advisor. And, then require the advisor to document his fiduciary status in writing.