What’s in a Word?

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Published by Lenny Hirst

In August of this year, Office of Management and Budget, based on a recommendation from the Department of Labor, delayed the implementation of the rule that requires an advisor to act in the best interest of their clients.  To the lay person, the rule seems reasonable.  It requires that someone put their clients’ interests ahead of their own when they give their clients advice about their retirement accounts.  If two different investments have similar characteristics and one has lower fees, the fiduciary rule would require the broker to recommend the cheaper investment. 

I know what you’re thinking, isn’t this already the law?  Actually, no.  Under the current law, all a broker has to do is make a recommendation that is merely “suitable.”   This lower standard, requires that a broker or insurance agent make a recommendation that will satisfy their clients’ needs rather than be the best recommendation for the client.

To give you an example, suppose you went to a Toyota dealership and you tell them you’re looking for a sedan that’s great in the snow and has the highest safety ratings.  The salesperson recommends a front-wheel drive Camry, makes the sale and collects the commission.  Since the dealership only sells Toyotas, the only way they can make money is to sell you a Toyota even if it’s not the best vehicle for you.

If the Toyota dealership was held to a fiduciary standard, they’d have to tell you that it sounds like you’re describing a Subaru Outback sedan and you should go to a Subaru dealership to get the car that best meets your needs.

Here’s the problem.  When you go to a car dealership, you know they’re going to try to sell you a car that they have on the lot.  When you deal with an insurance agent or stock broker, you presume they’re going to give you the advice that’s best for you when in fact they don’t have to.

To make things even more complicated, when you deal with a CERTIFIED FINANCIAL PLANNER™ professional, they must act as a fiduciary and make recommendations that are in your best interest.  However, that obligation only extends to when they are making financial planning recommendations.  As soon as they start talking about insurance or investments, their fiduciary obligation disappears, and the lower standard of suitability applies and they can recommend investments with higher commissions and fees.

What bothers me about this is that very few people will tell you when they are making recommendations that are merely suitable.  I have to wonder how many CFP® professionals tell their clients when they are not acting as a fiduciary.

So what’s the solution?  When you deal with anyone about your finances, simply ask them if they will put in writing, on their firm’s letterhead, that they will act as a fiduciary and put your interests ahead of their own 100% of the time.  Doing this does two things.  First, it lets them know that you know what a fiduciary obligation involves and second, it lets them know you’ll hold them to that standard.  After all, don’t you deserve recommendations that are in your best interest?

As an advisor, I hold no licenses to sell any “products” of any kind.  I can recommend life insurance but then my client would go to an insurance agent and tell them what kind and how much life insurance they need.  We don’t leave it up to the insurance agent to sell us anything.  In the same vein, I cannot receive a commission for selling any type of annuity or mutual fund.  I surrendered all those licenses many years ago simply because I never wanted a client to wonder if a recommendation was in their best interest or mine.

Learn more about a fiduciary advisor here

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