Who's Looking Out for You?

They are probably a close friend, a member of your church or club, a neighbor, or even a relative. You feel comfortable taking their advice because they seem more knowledgeable than you and they are “such a nice person.” Who can blame you for feeling that your financial advisor (an undefined and wholly unregulated term) is a trusted member of your “team” of counselors?

You’re not alone. Most investors are confident that their advisor is working on their behalf. According to a recent Financial Engines survey, slightly more than half of American investors believe that their advisors are always required to act in their in their best interests or as a fiduciary.

The word, fiduciary, was one that few had heard until two years ago when the U.S. Department of Labor started working on rules that would require anyone who provides advice on retirement investments to act as a fiduciary. The rule was scheduled to go into effect in April. The Trump administration delayed its effective date until June 9, 2017.

To act as a fiduciary means putting your client’s needs ahead of your own. Most financial advisors are not required to act in your best interests; they are merely required to offer their customers a product that is “suitable.” That means it can’t be bad for you, but it doesn’t have to be the best. 

Here’s a simple example: Imagine two mutual funds with identical portfolios, that mirror each other in every way. Both funds are suitable for your particular situation. Fund A charges a 5.75% commission (paid to the broker) and a 1.25% annual expense ratio (a portion of which is paid to the broker annually). Fund B charges no commission – 100% of your money gets invested – and only charges 0.25% per year (a true no-load fund).

A fiduciary advisor would have a legal obligation to, at least, present both funds to you. The “suitability” advisor could sell you the more expensive product and not even verbally disclose the high expenses (they must hand you a prospectus – which you are unlikely to read). Which type of advisor would you rather have?

If you are one of the 53% of Americans who believes that your “guy” or “gal” is one of the good, fiduciary advisors, you are probably wrong. According to a 2015 study from Marketwatch, of the 1.1 million providers of financial advice in America, such as stockbrokers (known as registered representatives), insurance agents, and registered investment advisers, only 1% are always required to act in your best interests.

Nine out of every ten of those nice folks providing financial advice is not always required to do what’s best for you and your financial future. Is it any wonder that most equity fund investors make less money than they would if they purchased the Standard & Poors 500 Index?

While 90% of financial advisors may not be required to act as your fiduciary, 93% of investors surveyed by Financial Engines, believe that everyone who provides financial advice should be required by law to act in your best interests. Yet, most of the financial services industry is opposed to the Labor Department fiduciary rule or to any other attempt to tilt the playing field in the clients’ favor.

Your relationship with your financial advisor is too important to treat lightly. It should not be based on friendship or blind trust. Your future life literally depends on the financial decisions you make today. Working with a fiduciary investment advisor does not guarantee financial success, but it does improve your chances. No matter who is advising, you must ask them if they always act as a fiduciary and then, no matter what they say, get it in writing.

To help you ask the right questions, we have created a simple one-page advisor interview form to present to your current financial advisor or anyone you might consider in the future.