Fewer workers these days are lucky enough to have a pension plan. The rest of us save for retirement through our employers’ contributory plans like the 401k, or a 403b or Individual Retirement Account (IRA). When we retire or change jobs, we are responsible for managing these accounts ourselves or hire financial advisors to do so.
Advisors come in all stripes: brokers, bankers, insurance reps, planners, or independent money managers. But they all fall in two broad categories: advisors who adhere to the “Suitability standard” and ones that are held to the higher “Fiduciary standard.”
Advisors who are Fiduciaries are required, quite simply, to put their clients’ interests above their own. It means avoiding potential conflicts of interest or disclosing conflicts where they exist. Trades should be placed with the best combination of low cost and efficient execution, and investment decisions are made after careful analysis, using accurate and complete information.
Advisors who are not Fiduciaries are merely required to believe their recommendations are suitable for their clients, after considering their financial needs and objectives. They can place their own interest or the interest of their firm ahead of their clients. Conflicts of interest are not required to be disclosed.
Why should you care? Under the lesser standard of “suitability,” it is possible that the products you are invested in, although suitable, may not be the best available to you. Advisors may have incentives to put you in products with higher fees or be pressured to use their firm’s proprietary funds rather than choose a better alternative from a competitor.
Proposed rules: The Department of Labor recently proposed rules that would require advisors who manage retirement accounts including IRAs to adopt the fiduciary standard. Understandably, the brokerage and financial industry is lobbying hard against the proposals, and their release date has already been delayed.
Meanwhile, armed with this knowledge, we hope more individuals will be encouraged to ask our advisors: “Are you legally required to put my interest ahead of yours?” If the answer is “no,” it may be time to ask some hard follow-up questions.
Ina Fernandez, CPA has over 25 years of investment experience, and is currently Managing Director at Birmingham Michigan-based Liberty Capital Management, Inc., which holds itself to the fiduciary standard.