There are two types of standards that financial advisors are held to: the fiduciary standard and the suitability standard. What’s the difference? The fiduciary standard holds a legal requirement that advisors must put their clients’ interest before their own. The suitability obligation, on the other hand, only details that the advisor has to reasonably believe that any recommendations made are suitable for clients. The problem is, regardless which standard an advisor follows, they can still carry the same title; financial advisor.
It’s important to be careful when dealing with financial advisors that adhere to the suitability standard because the advisor’s loyalty may be to the company he or she works for and not necessarily the client served. This can cause a conflict of interest because the advisor may recommend products that give their company and themselves high commissions, but cost the client more in fees. Contrarily, an advisor that holds the fiduciary standard would be required by law to recommend the best investment for the client, even if it means they don’t make a larger profit.
So how do you distinguish fiduciary financial advisors from advisors that follow the suitability standard? Just ask, they’re required to tell the truth. In fact, recently there has been a stronger push for a higher fiduciary standard in the financial industry.
In late February of this year, President Obama spoke at the AARP headquarters to announce his plans to establish a new “fiduciary duty” for retirement advisors, urging them to “put the best interest of [their] clients above their own financial interests.” The stark reality is that many financial advisors are steering people toward bad investments that have low returns, but ultimately have higher profits for the advisor. In an age where almost a third of those entering retirement have no money saved1, there is an increased reliance on financial advisors to guide investors down the right path. Senator Elizabeth Warren (D-Mass.) also voiced her concern on the issue at this AARP conference, stating:
“Some advisors and brokers recommend investments based on free vacations, on cars, on bonuses, fees, on other kickbacks that the advisor can earn from selling a lousy product to the customer. For large portions of the retirement market, it is perfectly legal to push that lousy product, and that makes it really tough for customers who could lose thousands, even hundreds of thousands of dollars in retirement savings when they fall into the hands of the wrong people.1”
The fiduciary duty rule was first proposed by the Department of Labor in 20102, but was set aside due to lobbying efforts by the financial sector. Since then, the DOL has formed a new proposal that protects investors while still giving financial advisors some flexibility. After President Obama spoke about the issue this past February, the Office of Management and Budget expedited the review of the proposal and completed it in 50 days3. The Department of Labor will issue a 75-day comment period open to the public, and then a public hearing held a month after the comment period ends3. Interested parties will have an opportunity to comment on the hearing’s transcript, then the input will be reviewed and a final draft of the rule will be formed.
At Pure Financial, we are pleased the DOL is making a stronger push for retirement advisors to hold the fiduciary standard. Pure Financial’s mission since day one has been to make a positive change in the financial industry by removing the conflict of interest between advisors and clients. Because of this, all financial planners at Pure are salary only employees that never collect commission and who are always required by law to put the client’s interest ahead of their own, adhering to the fiduciary standard.
Joe and Al discuss the new fiduciary duty in this weekend’s podcast. Listen here