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Does your financial advisor put your best interests first?

Financial Advisors can learn quite a bit from Caregivers; at least the Caregivers I have had the pleasure of meeting. Each of these wonderful people sacrifice of themselves and, too often, their spouses and children to ensure that their family member (usually Mom or Dad) receives the care they need and deserve. Not adequate care, but the best possible care available. They utilize a fiduciary responsibility on a daily basis putting the healthcare interests of their family member first.

When it comes to this trusted financial relationship, this is a question that every person considering the services of a Financial Advisor should ask. It is a question that should be discussed thoroughly with an Advisor before starting the relationship. In fact, it is a discussion you should have with your Advisor if you are already working together.

I enjoy my clients and my clients like me. What is the point in working with someone you do not like or whose actions do not constantly reinforce the faith you have placed in them? I realize the last question seems ridiculous; “Working with someone you do not like”. Almost every new potential client to whom I am introduced has an existing Advisory relationship. Yet, there they are sitting at the table with me searching for something. That something is different for each of them as we all have different challenges we face in our lives. Yes, at the core is a financial concern but there is always more to their story. The families I work with have multiple concerns, goals, and, often, unrecognized risks.

My approach when working with a client, whether an individual or a multi-generational family, encompasses a three-tiered approach. I liken it to a three-legged stool, as I find concepts easier to comprehend when you can build a story around an image. The three legs to a bullet-proof financial strategy include: financial planning, healthcare risk mitigation and the lifestyle choices forced upon us due to healthcare requirements, and legal/estate planning. If any one of these legs is not properly addressed what happens? The stool falls over from the weight of the occupant.

This brings me back to the title of this article:

Does Your Advisor Put Your Best Interests First?

What is the professional and legal responsibility an Advisor has to their client? We would all like to believe that the professional with whom you are working will always put your best interest first. And I remember a time that a man’s word was all you needed when conducting a transaction (my Grandfather taught me that). Unfortunately, that rarely is the case in today’s world.

A little publicized item in the financial reform bill moving through Congress would require anyone who offers investment advice to act in the best interests of the client. That there is a need to actually legislate this says a lot about the state of the investment business today.

Over the past 10 to 15 years, many brokers have co-opted the title of “Investment Advisor” or “Financial Advisor” without accepting the fiduciary duty of a Registered Investment Advisor as described in the Securities Act of 1940. Rather, they adhere to the “suitability” doctrine. In fact, some very large, household-name brokerages have been lobbying Congress hard to avoid having a fiduciary level of accountability imposed on their stock brokers. Not surprisingly, it is not uncommon to find the “suitable” investments at large brokerages to be those that pay the broker and his employer the highest fee.

Financial firms continue to blur the line between broker-dealer and investment advisor by inventing and bundling new products. Because of the diversity of these products and services, investors sometimes fail to distinguish between brokers and investment advisors along the lines that federal regulators define. A large part of the problems in late 2008 have been because of this disregard for a fiduciary premise and a drive to maximize profits.

What is a Fiduciary Responsibility?

Black’s Law Dictionary describes a fiduciary relationship as “one founded on trust or confidence reposed by one person in the integrity and fidelity of another.”

Some estimates claim that only 15% of advisers have a fiduciary responsibility. The Paladin Registry puts the number even lower, estimating that just one in 12 advisors have fiduciary responsibility.

Fiduciary advisors are usually Registered Investment Advisors (RIA’s) or Investment Advisor Representatives. These advisors are registered with the SEC or the state security division, and they are acknowledged fiduciaries that provide ongoing financial advice and services. An advisor with fiduciary responsibilities is held to a higher ethical standard, must declare any conflicts of interest that may arise, and should have the knowledge to provide appropriate wealth management services and advice.

What about Non-Fiduciary Advisors?

Industry estimates show that approximately 85% of financial advisors do not have fiduciary responsibility. This includes stockbrokers, insurance agents or simple sales representatives. They may hold various licenses, but since they are not fiduciaries, they are often more interested in selling insurance and investment products than managing your portfolio.

Non-fiduciary advisors are compensated through commissions, which are often equivalent to management fees over several years. In the end, stepping away from one of these products usually involves a hefty surrender fee–no matter how bad the service or the results.

Titles for non-fiduciary advisors are unregulated, which means they can adopt any title they like: financial advisor, vice president, financial consultant, financial planner or whatever else sounds good. Of course, this does not change the fact that they are really insurance agents or brokers. It also does not change the fact that they typically do not have a fiduciary responsibility to put an investor’s interests ahead of their own, which means they are generally more interested in selling financial products with the largest commissions.

These sales reps have limited disclosure requirements and are not allowed to have account discretion. Most of them receive a large commission up front on the initial sale, which means they have very little incentive to continue helping the client.

My recommendation for you is to have the tough conversations, ask the hard and, sometimes, uncomfortable questions, take control of your financial future. Seek out that Advisor you like and with whom you are comfortable having those difficult conversations. Your Advisor should not make you feel like you are being sold something. A pure Financial Advisory relationship is built on trust. Financial Planning is a mix of science and art. It is an educational journey where different options are explored, some are discarded while others are implemented. The ultimate decision is yours, the client. These are, after all, decisions that will have the greatest impact on your and your family’s financial future.

By Greg Lawrence