For years, financial service firms have been preparing for the day when they would need to serve as fiduciaries when giving guidance on your retirement accounts. This Obama-era initiative is scheduled take effect later this month. It would be a major shift in the duty financial advisers have to their clients that would mean a much higher standard of care.
But now President Trump has signaled that it’s likely the planned fiduciary standard for financial advisers will be modified. Clients and readers have noticed this change and have wondered what this means for their access to independent financial advice.
So what is the fiduciary standard and why should you care? In short, the fiduciary standard means financial advisers must put their client’s interest first and must disclose real or potential conflicts of interest. It’s similar to standard that doctors have for the patients, and attorneys and accountants have for their clients.
Supporters of the fiduciary standard think it’s a vital step in making financial planning a true profession, rather than a minefield of unregulated euphemisms such as wealth advisers and financial counselors. Currently most people who offer financial advice are held to a much lower standard, called the suitability standard.
The difference between fiduciary and suitability may seem industry inside baseball, but it’s a yawning gap. While fiduciaries must put your interest first, the suitability standard means that whatever recommendations your adviser gives you merely need to be judged “suitable” for someone in your situation. The advice does not need to be in your best interest. I’ve seen the remnants of “suitable” advice. It ranges from excellent, thoughtful planning to marginally legal behavior such as selling high commission and fee annuities to clients in their 80s.
Most everyone offering financial advice in insurance sales, bank and credit union wealth departments, and stock brokerage firms are not fiduciary advisers in all of their dealings with clients. The fiduciary standard would have changed their obligation to their clients regarding their retirement accounts. Even though these rules may be changed, some traditional financial services firms will continue in their efforts to move toward a fiduciary standard regardless of whether there are rules in place to force them to do so.
But what should you do if you want a fiduciary financial advisor and don’t want to wait for the Trump Administration’s review? You can ask your current advisor if they only act as fiduciaries in working with you. Also, there are financial advisors who have been fiduciaries for decades, although they are hard to find as they don’t sponsor golf tournaments or the Final Four. There are made up of mostly smaller firms sometimes with just a single fiduciary adviser on staff.
The best way to find fiduciary advisers is through one of their national organizations. The National Association of Personal Financial Advisors (napfa.org) has over 2,400 members nationwide. Its registered members are fiduciaries, Certified Financial Planners, and do not accept commissions. Other organizations made up solely of fiduciary, fee-only financial advisers include the Alliance of Comprehensive Planners (acplanners.org), the Garrett Planning Network (garrettplanningnetwork.com), and XY Planning Network (xyplanningnetwork.com).
In the interest of full disclosure, I am a member of two of these organizations including service on the board of one of them. But, I don’t think fiduciary advisers have a monopoly on sound financial advice. However, I do look forward to the time that when you go to a financial adviser, you know they have the education, experience, and fiduciary duty to you. Until our industry reaches that level of professionalism, you have to work a little harder to understand the background, training, incentives and legal duty of your financial adviser.