What is a “fiduciary” and why do you care?
You may have been hearing or reading more and more about financial advisors being held to a “fiduciary” standard and you probably wondered why that mattered. Up until now, stockbrokers and other advisors at firms receiving commissions (e.g., wirehouses, insurance companies, banks, broker dealers) were held to a “suitability” standard, which meant that they simply needed to recommend investments that were suitable to each client’s situation from a risk and time horizon perspective. In other words, if an investor said that they were risk-averse, then the advisor couldn’t invest in high risk investments (aggressive stocks, high yield bonds) in their account.
To contrast that, Registered Investment Advisors and Certified Financial Planner professionals are held to a “fiduciary” standard meaning that when they advise their clients, they must put their clients’ best interests first. The difference is that if there were two comparable investments with the same objective, one with a high commission being paid to the firm (and the financial advisor) versus another low-cost, no commission fund, a financial advisor held to a “suitability” standard could legally recommend the fund with the higher commission because it was suitable for the client, even if it was not in the client’s best interest due to the high commission! A proposed law would require that all financial advisors be held to the same fiduciary standard. What is interesting is that an article in the Wall Street Journal (WSJ) on July 19th (http://online.wsj.com/article/SB124536973514629609.html) reported that these changes to put the client’s best interest first could “upend” Wall Street! I think most people working with a financial advisor already assumed their needs were being put first, even if that was not the case. Fascinating how this change to better the investor’s experience could cause such turmoil!
Another article more recently in the WSJ on August 29, 2009 stated “Wall Street finally has agreed to put its brokers under the tougher fiduciary standard for their dealings with customers. Now a fight looms over how tough that standard will be.” I vote to make it as tough as possible. Investors deserve to know that their interests are always put first.
