Fiduciary standards within financial services firms
by Casey Smith
June 03, 2013 12:00 AM | 1139 views | 0 0 comments | 18 18 recommendations | email to a friend | print
Casey Smith (Staff)
Casey Smith (Staff)

You have worked hard and need financial advice in managing your success into the future. Sitting with a financial adviser here in town, you are given an investment strategy for navigating the risks that lie ahead. The adviser is a friend from church or in your Saturday golf group. You think that you can trust him or her, but what makes you certain? What accountability is there that the financial advice being given is in your best interest?

Many clients of financial services firms do not understand that there are two standards in the business of financial advice. The most common is the suitability standard to which most banks brokerage firms are held. Suitability means that a client must simply “qualify” for an investment. Remember “suitable” mortgages? In practice, this lets the adviser sell clients into higher-cost, less client friendly products; the actual outcome of the investment is secondary to generating the transactions. The advisers in this type of relationship are selling you a product and receiving a commission or transaction fee. You should approach this relationship just as you would a used car salesman.

In contrast independent financial advisers known in the business as Registered Investment Advisers, are held to a much higher fiduciary standard. Fiduciary advisers must work in the best interest of the client, like doctors and attorney’s. Fiduciary advisers are mandated to disclose any conflicts of interest between the client and the adviser, such as receiving compensation from anyone other than the client directly. In this type of regulation we often see very different investment strategies being deployed, as the interest of the adviser is now lined up with the client. The very basic concept of fee-only fiduciary advice is that the product should never pay the advice giver. The client should pay the adviser directly. After all, would you want your doctor to be paid by the drug company?

Beginning in 2013, British financial advisers are no longer allowed to receive commissions from products that they use for retail clients. The Netherlands, Australia, Hong Kong and India are expected to adopt similar rules. Why is the U.S., known for financial product innovation, not a leader in setting financial advice standards? Just like so many other issues, this is due to special interest groups. Since the Frank Dodd Act was put into place, the SEC has been discussing adding the fiduciary standard to banks and brokerage firms. Of course the same financial institutions that run ads saying that have your best interest in mind are also spending billions in fighting the new proposed fiduciary mandate.

Best estimates show that there are 450,000 people giving consumer investment advice in the United States. Roughly 10 percent are currently held to the fiduciary standard. The best way to tell if you are being sold product or given fiduciary advice is to simply ask the adviser, “Are you accepting fiduciary responsibility for your recommendations?” Note carefully their answer and decide truly if this is someone you want to do business with.

Casey Smith is the President of Wiser Wealth Management, a Marietta fiduciary fee only financial services firm offering portfolio management, accounting and legal services. Casey has spoken world wide about the importance of fiduciary standards in the financial services industry.

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