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Work with someone who works in your best interest

There is a lot of confusion about how different types of financial “professionals” work. On one hand, you have brokers or registered representatives (RR) who work for broker-dealers and insurance agents who represent insurance companies. On the other, you have investment advisors (IAR) who work for Registered Investment Advisors (RIA). While people use the generic term financial advisor to describe all three, there is a substantive and legal difference among them.

(The term financial advisor did not exist until the late 1990s and was a deliberate and brilliant marketing tactic to recast product sales people (i.e., brokers and agents) in a more positive light and blur the distinction among RR, agents and IARs). Suitability or Fiduciary?

RR’s and insurance agents work on the suitability standard. This means that as long as they get information about your net worth, determine how much risk you can handle and verify that you are financially qualified, he or she can recommend a product that is not necessarily in your best interest. You bear all the risk. Suitability is essentially a “buyer beware” standard filled with conflicts of interests.

In contrast, IARs work on the fiduciary standard. At the core of the fiduciary relationship lies both the concept of trust—clients entrust their finances to an advisor in a similar manner to how they entrust their health to doctors—and the notion that the fiduciary makes his own personal interests secondary to those of his clients.

Fiduciary (from the Latin fides, meaning “faith” and fiducia, meaning "trust") is a legal or ethical relationship of confidence or trust. Wikipedia defines a fiduciary duty as the highest standard of care. A fiduciary is to be extremely loyal to the person to whom they owe the duty and must notput his or her personal interests before the duty, and must notprofit from the position as a fiduciary, unless the client consents.

When you work with an IAR, being a fiduciary means that he or she has a legal obligation to always make recommendations that are in your best interest. And to the extent possible, he or she must avoid all conflicts of interest. When a conflict exists, he or she must disclose them to you upfront in plain English.

The current fiduciary debate exists only because stockbrokers, insurance agents, and other financial products salespeople stopped calling themselves what they are and began calling themselves financial advisors and consultants. As a well-respected peer states in his blog, “[They] shouldn't give financial advice or hold themselves out as financial advisors or consultants in the first place.”

The entire debate between suitability and fiduciary would go away by drawing a very clear legal distinction between who is a product salesperson and who is a fiduciary advice-giver. The law should require brokers to call themselves brokers and require agents to call themselves agents. Only those people who are qualified to provide financial advice and who embrace the fiduciary standard of care could call themselves financial planners, advisors or consultants.

So, when you’re looking for financial advice, under which standard would you rather the professional work: suitability or fiduciary?

The urgent need for a universal fiduciary standard

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