Do you know if your financial advisor is working for you? Before you assume that is the case, do you understand the difference between “fiduciary” and “suitability standards”? The Obama Administration has proposed and the U.S. Department of Labor has held hearings about the “fiduciary rule”. President Obama wants financial advisors to be governed by the fiduciary standard. In other words, he feels that stockbrokers and others should be required to put their customers’ interests ahead of their own (i.e., earning higher commissions). Is the President saying that stock brokers are putting their financial interest before yours? The answer to that is “YES!”
Most financial advisors who work for the major stock brokerage firms are governed by the suitability standard. As the current law provides, broker dealers, insurance sales persons and advisors who operate under the “suitability standard” are merely required to ensure an investment is suitable for the client when the investment is made. Why would your financial advisor not recommend what is in your best interests? One reason often given by former advisors who worked at major stock brokerage firms is the pressure asserted upon them by management to push products that ALLOW THE BROKERAGE FIRM TO MAKE MORE MONEY! Why recommend another firm’s product which may be in the best interests of the client, when an in-house product or another firm’s product, although not as good, is nevertheless suitable for the client and allows the brokerage firm to increase its profits. There is also less responsibility associated with the suitability standard. The fact that there may be a fee-sharing arrangement between the parties need not be disclosed to the client, and if the recommendation later becomes unsuitable for the client, the advisor has little responsibility to notify the client. Talk about taking the money and running.
The “suitability standard” contrasts with the “fiduciary standard” which registered investment advisors, or RIAs, must follow and which avoids conflicts of interests and operates with full transparency. If the investment later becomes unsuitable for the client, the RIA is required to inform the client.
If you want to learn more about the “fiduciary standard” versus the “suitability standard”, you should Google these terms. A U.S. News article found online, Is Your Financial Advisor a Fiduciary, can be found if you Click Here and it gives a very good summary of the differences. You may be surprised to learn that rather than embracing the fiduciary standard, there are many brokerage firm leaders who are opposing this standard. While there are undoubtedly financial advisors who are not RIAs but who work in the best interests of their clients, don’t assume your advisor is one. The article referenced above Click Here has some key questions that you should be asking your advisor to better determine if he is working in your best interests.
If you want to discuss your tax preparation, tax planning or investment concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
