One simple question. . .

You can learn a lot with one simple question. . .

There has been a good bit of press lately about the Department of Labor’s efforts to pursue a consistent standard of care for all types of financial advice providers. That’s a funny way to write it, but sadly, there is a difference between a financial adviser and an investment advisor. The distinction can be measured many ways, but the linchpin is the standard of care to which the “adviser” adheres in the interests of their client, themselves or their employer.

This is a critical but massively misunderstood or even unknown nuance in the industry for financial advice. It is almost as if there were two types of heart surgeons – those who had to put the patient interest first, or those who could put the interests of themselves or their employer alongside the patient. Which would you choose?

A financial adviser or broker, is held to a suitability standard. This simply means that the adviser must choose or recommend products or solutions that are suitable for the client, but beyond that, any other conflicts of interest (such as commissions, front-loaded fees, ongoing fee payments) may be accepted by the adviser and may not be clearly disclosed to the client. The heart surgeon can choose one of two valves: one pays him or her a fee to use, the other does not. What happens? These folks also go by the title “broker dealer”.

An investment advisor is held to a fiduciary standard. This means that the advisor must, at all times, put the client’s interests ahead of their own interests and the interests of their employer. Thus, if an advisor finds two solutions, the only guiding standard is that which is absolutely best for the client. How can an investment solution, or an insurance product which pays the advisor back a commission or fee for being chosen, ultimately be in the best interest of the client? Most investment advisors are organized as Registered Investment Advisors, “RIA”. They are regulated by the SEC or State Securities Regulator and most do not collect commissions, front-loaded fees or ongoing fee payments. Their fee model is straightforward: a percentage of assets managed or advised, or a flat fee model where the client pays for their services directly.

It is not our place to judge which of these models works best, but we have chosen the full fiduciary responsibility of the RIA path. We love the clear, bright line that guides our actions. Our clients understand how we are paid: a fee based on assets under management. We deliver the fee calculation to them each quarter, before we are paid. We invest our own portfolios directly alongside our clients. Any additional fees – transaction costs, management fees, etc, are a drag on client’s returns and our firm’s revenues: thus we are aligned have clear incentive to minimize these extraneous fees.

We meet folks and have clients who work or worked with brokers/financial advisers. Often they do not know what they are paying for the services. We have seen 3.5% being paid to a broker for management of a trust account. We have seen portfolios where 5-6% of the initial investment was paid out as a “front load” directly from the client’s assets. Many broker sold funds have fees attached to them which pay a small percent to the broker for as long as the client holds the investment. This is a fair model – everyone deserves to be paid for their efforts. But it is not as transparent as we like.

So, the one simple question for your “adviser” is this: What is your standard of care?

If the answer is “suitability”, then you have the right to ask how that individual will be paid based on your relationship.

If the answer is “fiduciary” then you know that individual has chosen to place your interests ahead of all others.