When you turn over your hard earned money to a financial advisor, you would expect that your best interests will be taken to heart. In the end, that’s not always the case.
Fiduciary vs. Suitability Standard
The standard to act in a client’s best interest is called fiduciary duty. Registered representatives and stockbrokers are held to a lesser measure, known as the suitability standard. Basically, it merely calls for brokers to sell investments they believe are suitable for their clients, not necessarily what’s best. This difference can mean a substantial amount of money in the long run.
For example, let’s say you invest $10,000 a year in a low-cost investment and end up earning more than $1 million over a 30-year period. Investing the same amount with your broker’s “suitable” product can cost you a few percentage points each year, leaving possibly hundreds of thousands of retirement dollars out of your hands, all while earning your broker more commission.
Strip away the jargon and the problem is obvious; most investment products sold can be deemed “suitable” that are not in your best interest. Unfortunately, the average investor often doesn’t know the subtle difference and is at a disadvantage because of how this profession operates.
Registered Investment Advisors (RIAs) and Investment Advisor Representatives (IARs) vs. Registered Representatives and Insurance Agents
The investment industry has evolved so now different professionals are governed by different standards. For instance, Registered Investment Advisors (RIAs) and Investment Advisor Representatives (IARs) are governed by the fiduciary standard; Registered Representatives, stockbrokers and insurance agents are not.
Registered representatives, stockbrokers, and insurance agents primarily sell on commission. Investment Advisors and Investment Advisor Representatives never receive commissions, only fees for managing client’s assets and providing investment related advice. Avoiding unnecessary expenses, 12b-1 fees, high turnover, and inefficiency is the key to a successful financial plan.
Recently, registered representatives and stockbrokers have been touting fee-based advising; however, know it is not at full capacity. FINRA has set guidelines where they may allow the advisor to take fees for financial plans, but not asset management fees. In other instances, the advisor may take fees to refer clients to a third-party manager on their approved list, but you won’t be able to use other managers, or even manage the portfolio yourself.
All in all, brokerage firms and insurance companies are being regulated; however, under a much weaker standard. Most individuals would be appalled to see how hard some companies in the financial industry are working hard to avoid acting in the best interests of their clients.
In conclusion, the next time you visit with your financial professional, find out if they operate under a fiduciary standard. If the answer requires explaining, chances are your investments are not operating to their maximum potential.