“That faith which is required of us is then perfect when it produces in us a fiduciary assent.” -William Wake
Hiring a financial planner who is not a legal fiduciary is a blunder. Why would we do that if given a choice? Do we even know there’s a choice? Every financial advisory company operates under a fiduciary standard of care or a suitability standard of care. It’s a choice. What’s the difference and how does it impact us?
There are pages written about these two terms. Simply put, advisors working under the fiduciary standard must legally place the interests of their clients above their own interests. Advisors working under the suitability standard may place their own interests at or above that of the client as long as the product/advice can be argued as “a suitable option” for their client.
Even more simply put, fiduciary is the highest standard of care. With a fiduciary, the advisor works for the client first, then his company/firm. With suitability, the advisor is within the law to work for the company’s interests first, then the clients. This is a big deal.
Suitability is asking a Yankees fan who the best team is. Fiduciary is asking an independent MLB analyst.
Suitability is asking the car dealership what the best car is. Fiduciary is researching consumer reports.
Suitability is asking a restaurant owner where the best food is. Fiduciary is consulting the food critic.
Let’s say, for example, our most prized possession is our child, our young child. We need to hire a sitter for the week. We notice there are two standards of care among “babysitter” professionals. Would we even consider hiring one who works for the company that chooses to operate within the lesser standard of care? Of course not. We’d never do that. Why isn’t it the same for our personal finances? Isn’t enough at stake? It matters.
The fiduciary standard establishes a built in incentive to deliver service in our long term best interests. Loyalty tends to be to the client, the service, the process, and its constant improvement. Without fiduciary requirements, loyalty tends to be towards the corporation, the product, and selling more of those products.
How can we know if we’re dealing with a Fiduciary? First, be knowledgeable about the difference. Second, interview advisors and ask directly. Last and most important, insist the financial planning firm provides a signed Fiduciary Oath prior to the engagement, such as:
The advisor shall exercise his/her best efforts to act in good faith and in the best interests of the client. The advisor shall provide written disclosure to the client prior to the engagement of the advisor, and thereafter throughout the term of the engagement, of any conflicts of interest, which will or reasonably may compromise the impartiality or independence of the advisor.
The advisor, or any party in which the advisor has a financial interest, does not receive any compensation or other remuneration that is contingent on any client’s purchase or sale of a financial product. The advisor does not receive a fee or other compensation from another party based on the referral of a client or the client’s business. I shall:
- Always act in good faith and with candor
- Be proactive in disclosing any conflicts of interest that may impact a client
- Not accept any referral fee or compensation contingent upon the purchase of sale of a financial product
A fiduciary cannot guarantee success or results. Nothing in life is guaranteed. It’s all about increasing our odds. We make decisions as best we can, with the available information. Why would we start out with the odds stack against us? The fiduciary standard of care is an essential starting place and foundation for relationship, process, and results. It’s the fertile soil for our crops to grow.
“I think a problem for most people in a fiduciary capacity is to eliminate self and greed.” -Shep Gordon
