When it comes to choosing an individual to manage your money, your chief concern will likely be trust. Who can I trust to help me make the best choices with my assets? How can I be sure that I’ll be offered the best advice for my unique situation and not handed a pre-fabricated, one-size-fits-all “financial plan"?
Quite simply, the answer is by making sure you work with a fiduciary. But not just any fiduciary—a true fiduciary.
The word “fiduciary” has been a buzz-word in the media over the past few years due to proposals to change regulations on financial advice, but the concept is often ill-understood by those outside the industry.
What is a Fiduciary?
It may come as a shock to you that not all financial professionals are legally required to act in their client’s best interest. Why? Because not all advisors, or professionals calling themselves advisors, are fiduciaries. In fact, a double standard exists in the financial advice industry between “fiduciary” advice and “suitable” advice.
What’s the difference? The Fiduciary Standard is the highest standard of financial care spelled out in the US legal system and requires that an advisor put the client’s best interests first. This code of conduct is adhered to by Registered Investment Advisors (RIAs) and enforced by the Securities and Exchange Commission (SEC).
In contrast, the Suitability Standard simply requires that a broker make recommendations that are suitable based on a client’s generic situation, but does not require the advice to be in that client’s best interest. In fact, according to US law, non-fiduciaries are legally authorized to place your interests last with likely zero repercussion if they so desire. This is a losing situation for a client.
At the heart of this difference is how your advisor or broker is compensated. While both an advisor and a broker may offer investment recommendations, their advice may be influenced by how they are paid. Different motives prompt different advice. A broker is compensated by making trades and/or promoting one financial product over another, while a fiduciary is not. It is not uncommon for brokers to deliberately make unnecessary trades in order to pocket the high (and oftentimes hidden) fees that will be charged to their clients’ accounts as a result. In fact, the government estimates that individual retirement accounts alone surrender $20 billion a year to ‘me-first’ investment advice from financial professionals who squeeze exorbitant commissions and fees from their unknowing clients. This is money that could have been used to enhance the client’s own financial plan, the client’s own future.
Whenever financial advice is influenced by compensation, an inherent conflict of interest exists. With this conflict at hand, there is no way to ensure that the recommendations provided intend to increase the client’s probability for success, or the advisor and his firm. Fiduciary advice, however, is based entirely on advancing the client’s chief financial interests above all else, without any compensation connections muddying the waters.
Not All Fiduciaries are Created Equal—Finding the Right Fit
Locating a “fiduciary” is only the first step, because not all fiduciary firms or advisors have the knowledge, personal dedication, or time to provide the highest level of fiduciary care to their clients.
When a macro event significantly impacts the markets and economy, such as the Coronavirus or Great Recession, every client’s financial plan needs customized attention in a very timely manner. After all, time translates into money. Whenever a major disruption occurs, your advisor will need to meet and talk with their clients about the impact of such changes and where to adjust the plan accordingly. Will your advisor dedicate the time to sit down with each of his clients for meetings or reviews when they are so crucially needed? Will your advisor then be able to align those results with each client’s big picture?
For a firm that is inundated with clients, one of two things happens: (1) the advisor applies a “cookie-cutter” solution to each client, regardless of individual circumstances or (2) devises a unique, customized solution for each client, but it takes months in reality before these changes are implemented, potentially costing clients significant sums of money and/or improper risk exposure in the meantime. This is not what serving in a true fiduciary manner looks like.
The reality is that too many “fiduciary” advisors are more concerned with increasing their Assets Under Management (AUM) than they are about caring for each of their individual clients. True fiduciary financial advice values client success above all else, even if that means the advisor's growth or firm expansion take a backseat.
Since an advisor’s ability to serve his clients in a fiduciary manner is directly impacted by the number of clients he has, I only offer my services to a small number of sales professionals seeking this type of high-level of care and involvement from their financial advisor. My client’s care will never be sacrificed for the growth of my firm. This model allows me to provide timely, high-quality advice that isn’t tainted by personal gain.
If you’d like to learn more about how Meenes Wealth’s true fiduciary services could benefit you, we’d be happy to discuss it with you during a complimentary Get Acquainted meeting.