Take a moment to consider this: what if you had a friend you could turn to whenever you had a financial question? Not sure how much of a house you can afford? Call your financial friend to walk you through the numbers. Don’t know which investments to choose in your 401(k)? If you work with a fiduciary financial advisor, you could have someone to answer that question.
All of us make financial decisions every week.
Most often, we make these decisions alone or we ask unqualified individuals to help answer our questions, which means we probably aren’t making the most financially advantageous choices. How comforting would it be to pick up the phone instead, ask a question, and get an answer that is not only correct, but in your best interest as well? I don’t know about you, but this sounds pretty good to me!
Unfortunately, this is rare in the United States.
The current regulation structure allows financial advisors to sell insurance and investment products that are not in your best interest. These advisors operate under something called the “suitability standard,” which essentially means they are not required to put their clients’ best interest first.
There is another group of advisors that follow a fiduciary standard. This simply means that these fiduciary financial advisors must provide recommendations that are in the clients’ best interest. Unfortunately, this group is much smaller than those who follow the “suitability standard.”
Let’s take a look at the effects of taking advice from a non-fiduciary advisor.
It’s common knowledge that there’s a looming financial crisis of Americans not saving enough for retirement. People have been taught very little about personal finance throughout their lives. If these individuals reach out to a financial advisor who falls under the “suitability standard,” they are likely to be sold expensive products that are not in their best interest.
For example, let’s say there’s an advisor who has two mutual funds he could recommend to you. The first mutual fund has low annual fees and good investment performance. The second fund has high annual fees and poor investment performance, but it pays a hefty commission to the advisor. The advisor who operates under the “suitability standard” recommends the expensive, poor performing mutual fund because he wants to earn a big commission; however, it’s not in your best interest to invest in this fund.
Large financial firms argue that a fiduciary standard hurts low- and middle-income investors. They claim that the suitability model allows them to help lower income people who can’t afford fiduciary financial advice.
This is a ridiculous argument. Variable annuities are just one type of product that some financial advisors sell to clients. These expensive financial products have commissions that range between 7 to 10 percent. It’s estimated that $95.6 billion of variable annuities were sold in the United States during 2017. That means investors paid somewhere in the range of $7 billion to $10 billion in commissions to big financial firms and their advisors. That’s hard-earned money people need for retirement.
When you are reaching out for financial advice, it’s important to know there are two types of financial advisors – fiduciary and non-fiduciary.
Like your friends, a fiduciary financial advisor will be there whenever you need them and will always act with your best interest at heart. So, if you’re looking for some financial assistance this year, the first question to ask any potential advisor is if they operate under the fiduciary standard. If they say yes, ask for it in writing. If they say no, then don’t work with them. It’s in your best interest not to!