The definition of a fiduciary is a difficult one to pin down these days. The challenge of determining if financial professionals are working in the best interests of their clients has recently become a complex and thorny subject. The DOL under President Obama attempted to define and regulate the definition of a client’s best interest and it almost became law. If not for an executive order from President Donald Trump in 2017, the DOL would have owned the authority of regulating a “client’s best interest” by applying a fiduciary standard.
There are many differing views about the most effective way to help and protect investors from abuse. I am not convinced this type of additional legislation would help determine if an advisor will have a client’s best interest in mind. Can we really regulate intent or unethical people to prevent them from acting unethically? Ethical professionals act ethically without checking the definition first.
Without doubt, there are unethical financial advisors just as there are unethical insurance agents, stock brokers, nurses, general contractors, drug manufacturers, surgeons and attorneys. The list goes on and on. There are unethical people in every profession and they typically don’t check the current fiduciary standard definitions before preying on consumers, in my opinion. They tend to act unethically no matter what. Attempting to regulate this seems like nothing more than a litigation attorney’s dream come true.
Consumers don’t want to get bogged down in litigation at 70 years old, that’s for sure. There are better ways to determine if a financial advisor acts in a fiduciary capacity.
For those who want absolute certainty, there is only one way to know for sure and that is by separating advice from everything else. In order for consumers to have 100% certainty about the advice they are receiving, they must pay fees for advice from fee only advisors who accept nothing other than fees from their clients. However, I do believe that with a reasonable amount of front-end due diligence, most people are quite capable of finding the good eggs in the financial services world. Earning an impeccable reputation takes a long time. There are many reliable ways to validate a person’s reputation.
Complaints is one way. If complaints about an advisor are chronic and from multiple consumers, this is usually a red flag, worthy of caution and further investigation. Are there complaints filed at the local, state and federal levels against an advisor? If so, how many? Does the person maintain good relationships with partners such as insurance companies or former employers? In my experience, I have found that most advisors and insurance professionals do everything possible to represent the best interest of their clients. Most professionals are willing to provide names of other clients and other professionals such as attorneys and CPAs who will report honestly when asked. I encourage my prospective clients to do an exhaustive search. Deep searches should be welcome by professionals working in the best interest of their clients.
A pattern should emerge about a person, one way or another.
The Fiduciary – Advisor Best Interest Standard – Can it Work for You? Fee only advisory firms are compensated only from fees paid by their clients. They accept no soft dollars, no commission sharing, weekend getaways, notepads, playoff tickets to events, etc. This should be promoted and stated in their fee contract where everything is transparent and disclosed. They will not sell or recommend products, participate in any kind of fee sharing arrangement, or make referrals.
Investors do not like paying fees for advice. When it comes to insurance, there is even more reluctance to pay for upfront advice. In theory, it may be a reasonable solution. In practicality, it has not proven to be a successful model on any type of large scale. There is a small number of fee only financial advisors and the group is shrinking. These are not “Fee-Based” advisors either, and that is an important distinction. Fee ONLY means they are paid by their clients, for their time. There should be no management fees, wrap fees, assets under management fees or any other kinds of fees. In this environment, impartiality and objectivity are the premium.
There are 2000 total billable hours in a professional’s year. If an advisor bills $200 per hour for 50 weeks, 8 hours per day, that generates a maximum of $400,000 of gross annual revenue. With breaks, vacations, sick days and personal days, 1500 billable hours is more reasonable. Considering that most people will NOT pay $200 per hour or $50 for a 15 minute phone call, an initial plan to assess goals and objectives can be can often exceed $10,000. There are usually additional fees to review current portfolios and work with other advisors on the team. To boot, most people will be hard pressed to find a fee-only advisor at $200 per hour. Don’t be surprised to see hourly rates starting at $300 per hour. Finally, there are annual recurring fees to manage the plan and provide ongoing service.
To run a fee only practice, employees are necessary and other business expenses such as rent, phones, taxes, insurance, equipment and supplies are needed. These advisors must make time for customer acquisition and client retention. These costs cannot be billed to existing clients and these tasks will reduce the gross number of hours for billing. The net income for most of these advisors is too low, resulting in an unsustainable model.
Is it possible to know if a financial services professional will act ethically and have your best interest at heart? I believe it is. To determine if an advisor is ethical and meets a fiduciary standard, contacting their existing clients is helpful. I suggest you check out their experience, existing or past complaints, their references and your instincts. With a little bit of due diligence, relying on a combination of these options will serve you best.