The business of financial advice is changing at a dizzying pace. These changes – many of which are long overdue – are being driven by advances in technology, shifting regulatory frameworks and evolving consumer preferences. With these changes have come added complexities and questions regarding the incentives of financial professionals. Whether you’re looking for a new adviser or evaluating the one you have now, it’s critical that you familiarize yourself with the standard to which your adviser is held as well as the incentives behind his or her advice.
The vast majority of financial advisers operate under one of two legal standards: the Suitability Standard or the Fiduciary Standard. Which standard your adviser operates under is a big deal. It’s critical that you understand the difference.
Today, most advisers still operate under the Suitability Standard. Under this standard, advisers are allowed to recommend products deemed appropriate – or suitable – for their clients, even if those products aren’t the lowest cost or best options available. Advisers are free to recommend high-commission and proprietary products that may enrich the adviser but can be detrimental to their clients’ returns and financial futures. Evidence of this behavior isn’t always easy to spot, and that is by design. Many times these imbedded costs, which can be quite significant, are difficult to quantify and may not even be disclosed on clients’ account statements.
On the other hand, a small but growing number of advisers operate under a Fiduciary Standard. It is estimated that less than 2 percent of advisers nationally operate this way. With this much stricter standard, advisers are legally obligated to place their clients’ interests ahead of their own. These advisers are typically paid a percentage of assets under management, thereby aligning their compensation with investment performance. Under a Fiduciary Standard, advisers must steer clear of conflicts of interest, base their recommendations not on what enriches themselves or their firms, but on those that enrich their clients, and transparently disclose their fees to clients.
Why does this matter? There are a limited number of factors within your control as an investor. Costs and investment selection are two of those factors. Layers of excessive fees not only erode your gains, but they also bias the advice you receive and limit your investment options.
First National Wealth Management proudly follows the Fiduciary Standard. We believe that by removing the traditional conflicts hampering the investment-advice industry that we can better align ourselves with our clients’ best interests. We do better when you do better.
If you’re wondering whether you are working with a fiduciary, all you have to do is ask. If you don’t like the answer you receive, we’d love to hear from you. Contact us today!