"Life is a gift and it offers us the privilege, opportunity, and responsibility to give something back by becoming more." - Tony Robbins
With great power comes great responsibility. Thank you Stan Lee! Investment professionals control massive amounts of private wealth. Sound financial advice can make or break most financial goals – especially retirement! The objective of the following insights is to help you understand what level of responsibility you can expect from investment professionals. This responsibility is often referred to as fiduciary duty. A financial fiduciary has a legal and ethical relationship of trust with his/her clients.
Excited yet? Think of fiduciary duty as having levels of responsibility, with every level having more accountability and liability due to the influence and control of other peoples' money. As a Certified Financial Planner™ and Accredited Investment Fiduciary™, I owe a very high level of fiduciary duty to my clients. With my own education and designations, a breach of this duty would likely be strictly enforced – I am expected to know better. I could lose designations, be fined, suspended, or even terminated from the industry altogether.
What does this mean? Professional financial fiduciaries can not claim ignorance or blame someone else for mistakes, as industry regulators hold such fiduciaries to a higher level of professionalism. For many, it is much easier to shrug off some of the responsibility by leaving the big decisions to someone else. Examples that are often outsourced to reduce fiduciary duty are: investment selection, asset allocation, and custodian. Don’t get me wrong, outsourcing fiduciary responsibilities is not necessarily a bad thing. In some cases, it is prudent or necessary for our clients well-being.
What are you paying for anyway? The point here is in knowing what level of financial advice you are paying for and where the financial decisions, made on your behalf, are coming from. Less advice, responsibility, and accountability should come at a lower price in my opinion. Industry pricing shows this is definitely not the case. Often an asset manager, who offers little to no financial advice, will charge the same fee as a comprehensive financial planner who spends hours guiding and planning for clients, while earning the same fee. The more regular, ongoing, and involved the engagement and less sophisticated the client, the higher the level of fiduciary duty. The more transactional, limited scope of engagement and more sophisticated the client, the lower the level of fiduciary duty.
Duty or rule? Advisor or broker? Time to muddy the waters. Offering investment advice for a fee, as an investment advisor representative, is a relationship that requires the fiduciary standard. What does this mean? It means that an advisor must put the clients' best interest before his/her own. Offering investment advice for a commission, as a registered representative, is a relationship that only requires the suitability obligation. Under the suitability obligation, the registered rep has to be mindful that recommendations are consistent with the interests of the customer. The suitability obligation is limited in scope and as long as the recommendation is consistent with what the client wants, the outcome may be irrelevant
To summarize, a financial fiduciary handles other peoples' money and has a duty to keep the interests of those under their care above their own. Not all fiduciaries are created equal. Greater responsibility means greater liability. Higher training, education, and designations further increase the responsibility and thus, liability. I am of the opinion that the greater the consequence of failure, the more accountable I would want my trusted advisors to be (wealth, tax, legal). That accountability comes in the form of fiduciary duty