In Support of the Fiduciary Standard
It’s one of the most fundamental and dear characteristics of the work we do at Empowerment Financial Guidance: earning the trust and confidence of our clients. We strive to do this in various ways, of course, including the intangibles of demeanor, openness, and honesty. We also have been very intentional in creating a structural business framework which maximizes transparency while minimizing conflicts of interest for our clients. We take an oath as fiduciaries, requiring us to put our clients’ interests first. For us, it’s a matter of principle. It’s also the only way to treat others that makes sense to us when their money is involved. We are, in fact, required to adhere to these lofty standards of care by virtue of being Registered Investment Advisors. It’s so straightforward, it raises the question: why isn’t every financial professional who handles other people’s money held to this same high standard?
This question is being raised anew as the Department of Labor prepares to release a revision to existing rules which would require more financial professionals to adhere to the fiduciary standard of care in the work they provide for clients. Advisors such as ourselves, whose practices are built upon the principle of transparency, feel that the answer is self-evident. People’s hard-earned savings and investments should be treated with the same level of care no matter where their money resides or who is overseeing it. Sadly, that’s not currently the case. For example, while Registered Investment Advisers (RIA’s) are legally held to the fiduciary standard, broker-dealers are not. Registered representatives of a broker-dealer can call themselves investment advisors, but they are held to the much more lenient standard of “suitability.” This means that they must offer investments which are suitable the client, but those same investments can also be beneficial to the broker, as is the case for commission-based investment products. While commissions are not inherently unfair, they create a conflict of interest in that a broker has incentive to offer products that are suitable but not necessarily optimal for the client.
The rules and standards are complex and frankly, confusing. Money held in a 401(k) plan is covered by the fiduciary standard, because these plans fall under ERISA rules (Employee Retirement Security Act of 1974). Money invested for the same purpose in an IRA is not required to be managed by a fiduciary, as IRA’s are outside the ERISA structure. The financial professional advising on the IRA may be held to a fiduciary standard or may not, depending on their business model. Other commonly-held types of investments also are not covered by this higher level of care, notably insurance products, including annuities. Many consumers do not know whether the manager of their retirement funds is a fiduciary or not, which erodes the very fabric which we, as advisors, strive to foster: trust. As a hockey player, it feels a little like playing against teams held by the referees to different rules. Some other teams, or perhaps individual players, are not to be called for a penalty for committing certain infractions that the rest of us are penalized for. In this example, spectators might not even know that there are two sets of rules being applied to different teams or players. Such a scenario would be nonsensical, of course. Our society could not properly operate without the rule of law, and at least a semblance of the fair and equitable application of it.
As Certified Financial PlannersTM, we are held to additional standards, including formal education, experience, ongoing training, and adherence to the CFP Board's practice standards and ethics requirements, among others. We are required to reduce, manage and disclose any possible conflicts of interest, so that clients know that our guidance is geared toward nothing other than their utmost care.
Historically, there has been considerable money to be made by “advisors” who obscure material facts about the products they are proposing to their prospective clients. The resistance to clearer advisor standards reflects the fact that some advisors still cling to selling lucrative investment products which mask their true cost, and which may or may not place investors’ interests ahead of those of the firms selling them. The holes in the current law are so numerous and wide as to allow ample opportunity for certain financial professionals to avoid being held to a fiduciary standard. It’s often the firms with the household names who support the status quo, spending considerable money and energy trying to block advances in client care: large brokerage firms, insurance companies, large banks – the ones whose profit model is now partially threatened by the prospect of being required to…act right. For greater perspective, read our blog on a closely related topic: https://empowermentfinance.com/blog/your-name-here/
Back in 1913, Justice Louis Brandeis said “sunlight is the best disinfectant.” It’s time the sunlight be allowed to shine broadly on our finances. For all our sakes.
