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Client Education More Important Than Fiduciary Rule

July 23, 2015

I agree with President Barack Obama’s calling for greater transparency in how advisors allocate assets on behalf of clients, but it’s not enough to make the industry more accountable. Today, long-term financial security is more dependent on the individual than ever before. And I believe all investors must be educated on their investment and advisory choices, so they can make better-informed decisions on how to grow and preserve their life savings.

Overall, two general categories of financial advisors exist: those who operate under a “suitability” standard and those who operate under a “fiduciary” standard. Those under the suitability standard offer their clients a range of products carried by the companies they represent, and in return they are paid commissions that are calculated as a percentage of the initial purchase. Any advice or products sold must be suitable to a client’s needs, objectives and unique circumstances; but ultimately, that broker is not required to put a client’s interest before its own.

By contrast, RIAs operating under the fiduciary standard are required by law to offer the best possible advice after taking into consideration the needs, wants and goals of their clients. The client must always come ahead of any other interests.

Some suitability advisors at larger firms face possible conflicts of interest, such as sales goals or incentives, which may encourage them to sell financial products that are not ideal for their clients. These shops are often under pressure to bring in new money and may pay their brokers and advisors a percentage of fees and commissions generated for the company.

However, investors deserve to be fully aware of any conflicts of interest, including questionable fees from mutual funds, prior to those products being recommended. But fees are not the only problem; these products should also be suitable for the client’s investment objectives. If one Googles “shared revenue” and the name of a broker, one will see which firms receive bonuses and commissions for selling specific products.

We see it every day. Investors are often unaware of these standards. We’ll meet with new clients, review their portfolio, and find the same issues. These deficiencies include inefficient portfolios where the returns do not justify the risk, a level of risk that does not match their tolerance profile, and fees that are disclosed in a stealthy manner. To make the financial-services industry fair, all advisors should be held to the same fiduciary standard. If they aren’t legally compelled to act in the client’s best interest, they should be required to share that in writing.

Clients should be comparing their advisor to a medical professional. For example, when they meet with their doctor, they know their doctor is required to have their best interest in mind in all situations. When the doctor recommends a prescription, they can feel peace of mind in knowing that the doctor isn’t doing so to receive a kickback on that product. The same should hold true for the financial-advice industry.

A few months ago, a couple asked for a complete financial-planning review. After a thorough analysis of their $1 million portfolio, we identified about 2.44% in high fees they were unknowingly paying. When we shared this information, they were shocked to learn about these wasteful costs.

In the end, their fees were reduced to 1%, for a saving of $14,000 per year. Not only did they end up with a better return, reduced risk exposure and lower fees, but they saved even more because their new advisory fees were now tax deductible. Indeed, clients must know the right questions to ask and the problems to solve before moving forward with any financial decisions.

Ultimately, there should be complete transparency and disclosure between advisor and client of investment or insurance products offered, as well as the fees being paid. Further, all advisors and product providers need to step up the level of education and customer-support services needed to make investors fully knowledgeable about how the industry operates. This can be done by increasing the number of education-focused meetings advisors have with clients and by making more educational webinars and studies available to investors. This way, even when less-sophisticated investors leave their advisor’s office, they leave with a much better understanding of their overall portfolio.