Today, my friend and colleague, Steven Young, CFP®, has graciously provided a guest post, giving us his thoughts on the fiduciary standard of care. Steven operates his Fee-Only financial planning firm, Steven Young Financial Planning, out of Springfield, Missouri.
A fiduciary is required by law to act in his or her client’s best interest at all times. What you may not know is that the vast majority of those who call themselves “financial advisors” or “financial planners” are not actually subject to a fiduciary obligation.
Under current rules, advisors who are compensated by commissions on the sale of financial products are subject to a lesser standard known as the “suitability rule.” This regulatory hurdle requires only that the product sold be appropriate for the client (in other words, not too risky) at the time of sale. In fact, these “advisors” can now sell you products that pay them bigger commissions, without advising you that there might be a far better (and cheaper) alternative for you – it just wouldn’t be as good for them. Moreover, this suitability obligation ends once the transaction is completed.
Registered Investment Advisors that have either registered with the SEC or the state in which they do business do have a legal fiduciary duty to their clients.
One of the most important questions you can ask of anyone offering you financial advice is, “Do you have a legal obligation to act in my best interests?”
It is the bright white line that separates those who sit on your side of the table and have a legal obligation to act in your best interests and those who sit on the other side of the table and have no such obligation.
Members of the Fee-Only Financial Advisory community firmly embrace our role as a fiduciary for you. This is not just a regulatory requirement imposed by law; it is part of our culture. Operating as Fee-Only firms to fulfill this role eliminates the conflicts of interest that may arise when advice is delivered through commissioned product sales.
To help educate consumers about the importance of the fiduciary relationship between advisor and client, the National Association of Personal Financial Advisors (NAPFA) hosts a website which provides information about the need for a fiduciary standard in the financial services industry as well as a checklist consumers should use in evaluating their own advisor.
If your friends and family are not working with a fiduciary advisor, please share this information with them.
Photo courtesy of Steven Young, CFP®