Do Unto Others?

In the financial services industry there has been considerable discussion on the application of the fiduciary standard of care for clients versus the suitability standard of care. There are generally two sides to the argument: on the fiduciary side the standard of care is to act in the best interests of the client (the standard that Jim and I are held to and embrace) and the other side which is a suitability standard of care in which the recommendation needs to be suitable, but not necessarily in the best interest of the client.

This is where things get sticky.

Acting in the best interest of the client is pretty cut and dry. After extensive questioning and gathering of information a recommendation is made to the client based on what is best for their situation. This means recommending keeping the current course of action, following a designed and carefully thought out plan, or recommending the client do business elsewhere.

Suitability on the other hand requires only finding an appropriate solution that suits the client. This may be a proprietary product that the advisor is only able to sell based on company and contract affiliation, licensing and compensation structure. In other words (and these are my words only) the advisor rationalizes the reason for the recommendation whether or not it’s in the client’s best interest.

Proponents of the suitability standard are normally compensated by commissions only or a combination of commission and fees. They are normally adamant about only adhering to the suitability standard. Why? The answer is simple: self-preservation. Think of it this way, if the only way you’re compensated is through the sales of a product then why would you want to be held to a standard that says what you’re selling has to be in the best interest of the client? What if you can only sell life insurance or annuities? As the saying goes, if you all you have is a hammer then everything looks like a nail.

Proponents of the fiduciary standard are dominantly compensated by fees directly from the client. What does this mean? This means the client pays the advisor for their advice, not a product sale. The relationship nor the compensation of the advisor isn’t tied to a sale it’s tied to the quality of advice. In other words, it’s very transparent. The client knows exactly what they’re paying for and can rest assured they’re getting advice regardless of a product sale. In this case the advisor has a tool box full of tools to utilize instead of just one tool.

Admittedly this type of system is not 100% perfect. There will still be a few bad apples and there will always be outliers, and there will be bad advice. However, from personal experience I have been able to witness both sides. Early in my financial career I worked for a firm that was commission only – one of those firms where I was told if the client wasn’t going to buy, send them to the 800 number. Really. Temptation to sell something, anything to make a living was high. I was arguably the worst salesperson they had. It’s extremely difficult to be a fiduciary in that situation – not impossible, but difficult.

Being able to work with a firm that is aligned with my own beliefs embracing the fiduciary standard there is zero temptation to recommend anything less than what’s best for the client. No sales pressure, no product pushing.

For those that would argue against the fiduciary standard let me ask this question. It’s a question I ask ask frequently of my students and colleagues that argue in favor of suitability.

“If roles were reversed and you were the client, what standard would you want applied to you?”

They answer almost always the fiduciary standard. The next question is rhetorical, but apt:

“They why should your clients get anything less than what you want for yourself?”

There’s usually silence.