With the Department of Labor coming out with rules that affect nearly every retirement account, many people are asking questions like, “What is a fiduciary?” and “What’s better: fee-based advisors or commission-based advisors.” The DOL makes it clear that they would prefer every account to move to a fee-based model similar to what Australia implemented in 2013. Whether this is a good move or a poor decision remains to be seen, but here are a few things you should know:
What is a Fiduciary? When talking about a financial advisor, a fiduciary duty means the advisor has to legally act in the client’s best interest. As a fee-based advisor, we take on the role of a fiduciary. This requirement is one step better than the “suitability” standard of commission-based advisors (also called brokers) which requires the advisor to recommend investments that are suitable for the client’s need.
Fiduciary vs. Suitability
Fiduciary vs. Suitability - Did you catch the subtle difference in description? The fiduciary standard requires advisors to act in the client’s best interest and the suitability standard requires the product to be suitable for the client. DO NOT STOP READING. This does NOT mean fee = good, commission = bad. The commissionable product may very well be the most appropriate product to fit your needs. It’s just about how the advisor approaches it and what the advisor has the ability to provide. Most independent advisors can operate under both to provide you the best options for you situation.
Product up vs Client down - When I explain the difference in fiduciary and suitability, I think of which way the decision is made. A fiduciary is working with a client to determine what is needed and which product fits the client’s need the best, whether fee-based or commission. An advisor who is only a broker looks at what products are available and tries to match them to the client, even if there may be a better alternative.
For example— Imagine going to the Apple Store. You explain exactly the features of the phone you’re looking for and you describe the Galaxy Note perfectly. A fiduciary will tell you that the Galaxy Note might be what you are looking for, they will explain that the iPhone Plus is very similar if you would like an alternative, and they will share with you where to buy one, even though they will not be paid if you buy the Galaxy. A broker operating under suitability standards will probably sell you the iPhone because it is what they know and have access to. They probably will not mention that there are other options. As you can see, there can be a conflict of interest here.
Choosing A Financial Advisor
Which is better? - When you are choosing an advisor, we feel it is important to take into consideration how the advisor is giving you advice and how the advisor is paid. In the current financial world, there is no one approach or answer. Just be sure to find an advisor who is looking out for you!