Originally published in the August 2020 issue of Dominion Magazine
BY: DEANNA RANKIN, CFIRS®
For many people, understanding the jargon most financial advisors use when discussing investments can be a challenge. There are two words, however, that individuals should learn when it comes to discussing their wealth with a financial professional: fiduciary and suitability. Knowing the difference between the two is important because it affects the quality of advice you receive, who provides the counsel and, quite possibly, how much your wealth grows in the years ahead.
The difference between fiduciary and suitability standards
Under federal law, there are two regulatory standards that govern financial advisors: the fiduciary standard and suitability standard. Under the suitability standard, advisors are required to make sure investments purchased by clients are suitable for their needs. For instance, an advisor could recommend (and earn a nice commission from selling) a mutual fund with expensive front-end fees – even though lower-cost alternatives exist. To meet the suitability standard, the fund doesn’t have to be the best or cheapest – it simply has to be appropriate for the client.
Under the fiduciary standard, advisors have a legal obligation to always act in the best interest of their clients. That means the professional must consider a number of factors when recommending investments, such as the reasonableness of fees, the potential for conflicts of interest and the riskiness of the investment, among other considerations.
A brief history of fiduciary standard
Individuals pay dearly for the mistake of working with an advisor who is not acting in their best interest. A study by the U.S. Council of Economic Advisors found that:
• Conflicted advice reduced client investment returns by around 1% each year
• The aggregate annual cost of conflicted advice is about $17 billion each year
Over the past decade, the federal government has made several attempts to protect investors from shady advisors who accept undisclosed payments from financial services companies or steer clients into inappropriate financial products.
In 2010, the Department of Labor (DOL) proposed new regulations to expand the categories of professionals deemed fiduciaries under the Employee Retirement Income Security Act of 1974. That effort went nowhere due to opposition over costs and liability concerns. In 2016, the DOL tried again to broaden the definition of a fiduciary (which became commonly known as the “fiduciary rule”) to include any professional providing retirement planning advice or working with retirement plans. That effort effectively ended on June 21, 2018, when the 5th Circuit Court of Appeals ruled it would not enforce the new fiduciary standard, noting the DOL had overreached its authority. The DOL hasn’t given up and on June 29 announced new regulations that would make the fiduciary rule official.
The proposed rules can only help, not hurt, investors. When you are working with a fiduciary, you can sleep well at night knowing your advisor is:
• Putting your best interests first
• Acting prudently and providing advice that reflects the skill, diligence and sound judgment required to meet your needs
• Documenting specific reasons why investment recommendations are made
• Avoiding conflicts of interest
Finding an advisor that understands your financial situation and future goals can be challenging. When selecting an advisor, ask your most trusted friends and neighbors for recommendations. And when interviewing an advisor, always ask if they are serving you as a fiduciary.
At Argent Trust, we have always believed the fiduciary rule is the gold standard for serving our clients. Being a fiduciary means we are loyal to our clients. It means establishing and building strong, lasting relationships that allow us to fully understand their needs and to help them achieve their financial goals. It’s not about explaining the possible outcomes using complex investment models, but more about providing easy-to-understand financial plans that can be adjusted quickly if needed.
Our company was founded 30 years ago with the philosophy of always putting the client first and always providing exemplary client service. We have acted as fiduciaries for our clients since day one and will continue to act in that role for the next 30 years and beyond. And it’s why we will always be ready and present for each client every day.
To learn more about how Argent Trust or Argent Financial Group can help you with your trust and estate planning needs or investment management strategies, please contact me via email (firstname.lastname@example.org) or phone at 210.353.0555, or reach out to any of our Argent Trust Company professionals at 817.502.2931. We are ready to help.