The fiduciary standard has long been sought after by consumer advocates, as the great majority of financial professionals are held to a much lower standard of care – one that often leaves the consumer of financial services exposed to higher costs and a low likelihood of advice being in his or her best interests. Last year, proposals were offered in Congress to require the fiduciary standard of all regulated financial professionals – which is a step in the right direction.
However, intense lobbying efforts by the fatcats, the heavyweights of the financial services industry (think banks, brokerages, and insurance companies) has just about killed the concept of an industry-wide single standard altogether. The original proposal by Senator Dodd (head of the Senate Banking Committee) that was to require a fiduciary standard across the board has been withdrawn due to intense opposition from lobbied members of the committee. Now the committee is working on a compromise, which is not likely to carry the same requirement.
WHY?
You’ve got to ask yourself – Why? Why is it so important to these companies that their sales forces are not held to a standard of fiduciary care? After all – the fiduciary standard requires that advice given is in the best interest of the consumer. Who could be against something like that?
If you look at the industry makeup, you’ll get a clue: 90% of the members of the financial professional industry are not held to a fiduciary standard, and much of the remaining 10% are small, independent firms, not backed by large marketing budgets. The reason becomes clear when you think about where the money is – it takes a lot of hard work to provide a fiduciary level of care, and as a result it can be costly to provide, and therefore difficult to justify. It is much more lucrative (and cost-effective) for these companies to provide one-size fits all solutions to masses of clients, especially if you don’t have to care if the solution is in the best interest of the client.
When there are billions of dollars annually at stake, it’s not hard at all to understand why the lobbying effort against the fiduciary standard is so intense. If this standard were to come into being, current sales techniques would have to be totally re-tooled, and likely the vast majority of the existing sales force would have to be replaced, due to increased training required to adequately provide the level of care that the fiduciary standard will necessitate.
So what can you do?
As consumers of financial services, we all owe it to ourselves to remain diligent – to understand the requirements and standards that our financial professionals are held to. Just because Congress isn’t up to the challenge of requiring a fiduciary standard of all financial professionals doesn’t mean that you have to swim with the sharks.
Know that your insurance guy, the broker down the street, and those bank employees are only required to provide you with “suitable” solutions, not solutions that are in your best interests. That’s not to say that you will never get a good solution from these folks – most often the non-fiduciary guy or gal truly wants to direct you to the right solution. But if a choice comes down to selling you a product that’s suitable versus pointing you to a solution that’s in your best interests but doesn’t pay off for him or her… it’s not hard to imagine that the product sale would win out most of the time.
Instead, seek out a true fiduciary, Fee-Only, CFP® professional to get your advice from. (You can start your search at www.NAPFA.org, the National Association of Personal Financial Advisors.) Those other guys are salesmen – go to them specifically to buy your insurance products, investments, and the like – but get the advice of a fiduciary advisor first.
Photo by Chika