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The Fiduciary Standard: What it Is and Why it Matters

Post by Paul McClatchy

There is an old axiom from the early days of the financial industry that “investment products are sold, never bought”.

The gist of this was that most people were pressured into investments they didn’t need, want, or even understand.  The “investment professionals” of that era were salesmen known as “Stock Brokers” who would earn commissions on all orders they were able to generate through their clients.  In Fred Schwed Jr’s 1940 book, Where are the Customers’ Yachts?, this humorous yet scathing book critiqued an industry which appeared to earn more from its clients in commissions than its clients earned from its services and advice.  While movies like Wall Street, The Boiler Room and The Wolf of Wall Street perpetuate the negative stereotype of the industry as a cadre of mercurial salespeople, in fact the industry has been undergoing a major paradigm shift since the 80s: from commission driven sales to fees for professional services and client-centric advice.

While certain segments of the industry still cling to the old hard-sell business model of the past, there is an increasing trend towards a professional service model that requires the advisor to be held to a higher standard when working with clients.

Though vaguely understood by the general public, there exist two differing standards of customer care that they may receive based upon the type of advisor they choose to work with for their investment advice.  Brokers and representatives of companies that sell investment products to the public adhere to the “Suitability of Standard Care”, which mandates that the transactions are suitable for the clients’ needs.

Unfortunately, the term “suitable” can be malleable rather than finite.

Alternatively, Registered Investment Advisors are held to a “Fiduciary Standard”, which dictates that they place their clients’ interests in front of their own. “Fiduciary Standard” is not equivalent to “Suitable Standard”. The Department of Labor, under President Obama, tried and failed to get the fiduciary standard to apply to all advisors who consulted on retirement plans.  

Clients today need to know that all firms are not the same, and that there are tools they can use to find the firm that may be a good match.

Prior to starting a relationship with an advisor, clients can vet their potential advisors through a FINRA sponsored website which can let the public know if  their advisor has ever had a complaint filed against them.

Next, a client ought to interview several firms for comparison. A web search of “what to ask a financial advisor” (or see our blog post on the topic here) will uncover numerous articles and lists focused on helping the general public better vet potential advisors.

Key questions ought to be focused on:

How an advisor is paid and what the total cost of the advisor’s services will be?

What is the scope of their services?

Do they offer investment advice, financial planning, or both?

Most importantly, do they work in a fiduciary capacity or as an agent of a firm?

A good start for questions is this list from the CFP® Board’s website. It should be noted that while some personalities claim to hold themselves to fiduciary standards, this is in fact not the same as being held to a fiduciary standard by a third party, as CFP®s and Registered Investment Advisors (RIAs) are.  The general public needs to know that it ought to expect expert service from a professional who has their best interests in mind, and the best way to meet that expectation is to go beyond simply reviewing a company website while researching advisors.   

Planning Capital Management Corp is a Registered Investment Advisor with the SEC, and we are held to a fiduciary standard with all of our clients. We offer full financial planning in conjunction with investment advice and portfolio management. Should you have any questions about the fiduciary standard, questions to ask a potential advisor, or just general financial planning questions, you can reach us at: (215) 709-5100 or info@planningcapital.com.