IS YOUR ADVISOR A FIDUCIARY?

Many years ago I was affiliated with an investment firm that was bought out by an insurance company. We were promised the deal would improve service and product availability. As an added bonus the new company provided health insurance coverage to its reps.
 
Initially it was a good relationship, with them leaving me alone to run my business without corporate interference. Quite regularly they would send me notifications from the home office of investment ideas along with literature highlighting some of their insurance offerings. It was useful information and I occasionally found their products provided a good solution for my clients’ needs.
 
It wasn’t long before I noticed the material from the home office was focusing less on investing and more on their proprietary insurance offerings. Since they were mainly an insurance company this did not surprise me. Then one day I received a call from an office rep asking why I was not selling more of their insurance products. I responded that I had a responsibility to my clients to do what was in their best interests and so I used their products only when they provided the best solution. I was then told that if I didn’t sell a minimum quota of company sponsored insurance products, my company health plan would be terminated. Shortly after this conversation I resigned my association with that firm, being unwilling to work in an environment that did not allow me to put my clients’ needs first.
 
For several years regulators have been trying to clarify the level of care financial advisors owe to their clients. Currently there are two standards. One follows a “suitability” definition which means that any product offered a client must be suitable to their needs. The higher level is known as the “fiduciary” standard which means all products recommended must be in the clients’ best interests. I can illustrate the difference with a simple analogy. Suppose an 80 year old needs a new car to drive mostly around town, about 3000 miles per year. The salesman might sell her an $85,000 BMW, which would certainly be suitable as it would get the job done, but would paying for such an expensive luxury car really be in the buyers best interests? (Although it could be argued the sale of the BMW would probably be in the salesman’s best interest) The fiduciary standard requires a financial advisor to put a clients’ interests ahead of their own, but a large number of financial advisors in the securities and insurance industries are not currently required to abide by this higher level of care.
 
As the regulators attempt to sort out the issue, it is useful for the clients of financial services to know that advisors work under two different standards. Knowing which standard your advisor is bound by will help you know whether what you are being recommended is required to be in your best interests, or if it just satisfies the lower “suitability” standard.