Originally published on BenefitsPro.com on November 30, 2022
A financial advisory relationship is based on trust. Investors understandably want to know that the advisor they’re trusting with their money is going to do what’s in their best interests — not the advisor’s.
While there are many good and trustworthy people in all sectors of the financial services industry, only certain advisors have a legal responsibility to deliver a higher standard of care for their clients. Those advisors are called fiduciaries.
According to a recent survey by Spectrem Group, more than 80 percent of investors believe their advisor is a fiduciary — but the true percentage is almost certainly lower. Many investors don’t take the time to clarify the level of their advisory relationship, likely because as they develop comfort and trust with their advisor, they might feel that it’s unnecessary.
Although the concept of fiduciary duties extends far back in history, the term is uncommon and unfamiliar outside of the financial services world, and can be hard to explain. The core of the idea is that a fiduciary-level advisor has to serve their clients with total objectivity, thinking solely of how the investment would benefit the client, regardless of how it might affect the fiduciary. A fiduciary must always put others’ interests in front of their own.
Other advisors adhere to a less stringent set of obligations called the suitability standard. Under the suitability standard, an investment being presented to a client must be suitable for their circumstances, but doesn’t have to solely serve the client’s interests. For instance, an advisor might receive a commission if their client invests in a particular investment, which might be suitable but would also serve the interests of the advisor.
There’s certainly a grey area at times. Some investments almost inadvertently violate the fiduciary standard because of the way they’re structured and how an advisor gains access to them. They might not fully impact the decision that’s being taken by the advisor, but arguably have some influence, either known or unknown.
The effect on employee benefit plans
The standard model of financial services has changed since I entered this industry almost 40 years ago. When I started, it was more of a brokerage model, with advisors or brokers making commissions — sometimes very high ones — from recommending particular mutual funds. In the last 20 to 25 years, our industry has seen a big migration to a fee-based approach.
Historically, employee retirement plans were not structured from a fiduciary standpoint. Additional fees were often embedded in the investment products packaged inside the plans, and participants often had no idea what they were really paying and to whom.
Thankfully, Department of Labor guidelines and disclosure requirements over the last few years have increased the transparency of these plans, bringing the relationship of advisors and retirement plan investors closer to a fiduciary one. However, I’m still not convinced everything is as transparent as it’s intended to be.
The ESG controversy
One growing controversy in the financial services world could affect not just retirement plans, but investments in general. It involves ESG (environmental, social, and governance) investing, a set of standards used by socially conscious investors to evaluate potential investments based on companies’ business decisions.
The Securities and Exchange Commission is considering changes to disclosures surrounding ESG investments, which could put parameters around the decision-making process and leave fiduciary-level financial advisors in a challenging position.
If advisors are required to allocate a certain percentage of a client’s portfolio to a certain kind of investment, the decisions they make won’t always be the best interest of the client, which is inherently a violation of the fiduciary standard. In addition, there’s currently no agreed-upon standard of what an ESG investment is. People define the term differently across different markets or locales because of their own ideas of what it means, which would lead to confusion if that investing standard was mandated widely.
Some larger management firms have begun to promote ESG investments, but they’re viewing the issue through a political prism, which in my view is also a violation of the fiduciary standard. Wherever you fall on political spectrum should not affect your responsibility to your client.
An open conversation
As CEO of a financial services company, I can attest that following a fiduciary standard not only better serves our clients, but helps our company from a business standpoint as well. Unlike a commission-based model that requires advisors to be constantly finding new clients from which to generate business, fiduciary-level advisors are aligned on the same side of the table as the client and are able to focus on growing investments over the long term.
How can you tell if your advisor is a fiduciary? The simplest way to find out is to ask. During your next meeting, find out if they’re receiving compensation or any other kind of benefit for recommending a particular investment product, or if the fee you’re paying them is the only compensation they’re receiving. If you get a clear confirmation that they’re operating on a strictly fee-based structure, you can know you’re dealing with a fiduciary.
Whether your advisor is a fiduciary or provides services under another standard, it’s beneficial to speak openly with them about their compensation structure. Any advisor who truly has their clients’ interests first will be more than happy to have that conversation.
About the author:
Kyle McDonald is founder of Argent Financial Group and has served as the only chief executive officer of Argent and its predecessor since May 1990. Argent Financial Group is a leading, independent, fiduciary wealth management firm. Responsible for more than $35 billion in client assets, Argent provides individuals, families, businesses and institutions with a broad range of wealth management services, including trust and estate planning, investment management, ESOPs, retirement plan consulting, funeral and cemetery trusts, charitable organization administration, oil and gas (mineral) management and other unique financial services. Headquartered in Ruston, Louisiana, Argent was formed in 1990 and traces its roots back to 1930. For more information, visit www.ArgentFinancial.com.