Is Your Financial Advisor Working For Your Best Interest?
“Fiduciary Duty” is the term for the requirement of an investment advisor to act in the best interest of their clients, putting the client’s needs above their own. This type of advisor provides advice and recommendations that are viewed as being the best option for the client and if anything is a conflict of interest, by law, they need to disclose it upfront before any contracts are signed.
On the other hand, a broker in the business of selling securities to people for others often call themselves financial advisors, financial consultants, wealth managers or advisors or registered representatives. Nonetheless, stockbrokers do not work under a have a fiduciary duty to the client. The stockbrokers are exempt from having to comply with a higher standard of ethical behavior towards their clients since legally they are seen to be in the business of being a broker or seller of investments and they do not receive compensation for the advice they give clients. It is in the service of selling a product and as long as the product is suitable, that satisfies the letter of the law.
After the banking collapse and the ensuing mistrust of Wall Street, consumers are certainly wary about investing their money. A 2012 survey by the Consumer Federation of America revealed that slightly more than half of respondents said “it’s hard for me to know who to trust for financial advice” (55%), “to me investing seems complicated” (52%), and “I’m worried about losing my money if I invest it” (55%).
This situation of distrust is perpetuated since registered brokers presenting themselves as “financial advisors” or “financial consultants ” lead investors to believe they are acting in their best interest. An SEC- commissioned study found that 59% of investors had the impression that their “broker” was required to act in their best interest. Only 34% of investors understood that this type of advisor typically was paid on a commission basis based on fees generated from the products they recommended.
This is too bad since it has been shown that working with an independent financial professional who abides by a fiduciary standard of care, where they are obliged to put their client’s best interest first and make recommendations based on their clients’ whole financial picture can add another 3.5 % to their portfolios even though they are paying 1.5 percent to manage their money.
How is this possible?
No Independent Financial Advisors are not clairvoyant. Most people can’t out guess the market and if they do they can’t do it consistently over time. Instead, they are able to increase the value of their client’s portfolios 3.5% over what they could do with registered reps by:
- Advising their clients’ based understanding their financial picture and taking everything into account.
- Making recommendations based on the best option for their clients since they are under no pressure to sell products that are not ideal for their clients.
- Receiving a fee for their advice rather than working on commission.
- Acting as a stabling force that keeps their clients from hasty actions in turbulent markets which would not be in their client’s best interest. It has been shown that if you miss the 5 best days of the market in any given year you could lose up to ½ of what you would have earned.
- Doing a comprehensive client risk tolerance analysis and making investment decisions that fall within this safe zone and see that they stay in that zone over time.