The definition of a fiduciary can be a difficult one to pin down these days. The issue of determining if financial professionals are working in the best interests of their clients has become a complex and thorny subject. In the last several years, 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. I am not convinced that this type of additional legislation would be a reliable practice to determine if an advisor will have a client’s best interest in mind. Can we really regulate intent or can we regulate unethical people and prevent them from acting unethically? Ethical professionals act ethically without checking the definition first. Without doubt, there are unethical financial advisors, insurance agents and stock brokers. There are unethical nurses, general contractors, drug manufacturers, surgeons, attorneys and people selling cars. The list goes on and on. There are unethical people in every profession. Unethical people don’t check the fiduciary standard laws before acting unethically, in my opinion. They tend to act unethically no matter what. Attempting to regulate this seems like a litigation attorney’s dream come true.
In some cases, it might be a deterrent but I fear it won’t in most. Consumers don’t want recourse as their primary objective. They want deterrence and help avoiding a mess. They don’t want to get bogged down in litigation at 70 years old. There are better ways to determine if a financial advisor will act in a fiduciary capacity, acting ethically and professionally.
For some who want absolute certainty, in my opinion, there is only one way to know for sure. Before stating it, allow me to say a few things about a fiduciary standard and a client’s best interest. 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. In my experience, I have found that professional 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, attorneys, CPAs and civic friends who will report honestly about the person. I encourage my prospective clients to do an exhaustive search. Deeper searches should be welcome by the right professionals. 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?
A pattern should emerge about a person, one way or another.
The Fiduciary – Advisor Best Interest Standard – Can it Work for You? The only way to know for sure is to hire a Fee ONLY consultant who theoretically will have your best interest at heart. Because they are not incentivized for their recommendations, nothing should stand in the way of what is best for you. These firms and their advisors are compensated only from fees paid by their clients. There are no soft dollars, no commission sharing, weekend getaways, notepads, playoff tickets to events, etc. This should be promoted and stated in the fee contract you sign with these advisors. They will not manage your assets, sell you products or make referrals.
However, there are very few 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 only paid by their clients, for their time. There will 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 is a small number of Fee Only Advisors because a fee only practice has not proven sustainable. Investors do not like paying fees for advice. When it comes to insurance, there is even more reluctance to pay for upfront advice. In the abstract, it seems like a reasonable solution. In practicality, it does not work.
For example, there are 2000 billable hours in a year. If an advisor bills $200 per hour for 50 weeks, 8 hours per day, the advisor will receive $400,000 of gross annual revenue. With breaks, vacations, sick days and personal days, 1500 billable hours is more reasonable. Most people will NOT pay $200 per hour or $50 for a 15 minute phone call. To get an initial plan to assess your goals and objectives, it can often cost $10,000 or more just to get started. The advisor must review your current portfolio, work with your other advisors and spend time learning your overall plan. This retainer fee is not free or built-in to the fees because that changes the purity of the fee-for-service advice. 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.
To run an advisory business like this, 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. Neither of these costs can be billed to existing clients and these tasks will reduce the gross number of hours for billing. The net income for these advisors is too low and the result is an unsustainable model. The bottom line is that it does not provide sufficient revenue for an advisor to break even.
Can you tell if a financial services professionals will act ethically and have your best interest at heart? I believe you can. To determine if an advisor is ethical and meets a fiduciary standard, talking to their existing clients is incredibly helpful. I suggest that you rely on 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.