Are You Getting Financial Advice From a Sales Rep or a Fiduciary?

  You may have been hearing the term ‘fiduciary’ more often recently; consumers are increasingly aware of the fact that not everybody in the financial services industry acts in the best interest of their clients. Unfortunately, the financial and investment world is full or corruption, greed, and lack of transparency.  At Horizons Wealth Management, we have noticed that more and more individuals are doing their own research and seeking out Fee-Only advisors who adhere to a ‘fiduciary standard.’  So, what is fiduciary? Investors should really pay attention to this topic.  A fiduciary is someone who is required, by law, to act in the best interests of their client. Attorneys, accountants and even real estate brokers acting on a client’s behalf must act as fiduciaries. But in the financial services world, it’s not always clear who is and who is not a fiduciary. Anyone can make the claim to be a financial planner.  The neighborhood stockbroker may call themselves a ‘financial advisor’ and be a pillar of the community. Your insurance agent may have managed your homeowners and auto policies for years, but should they be advising you on your investment and retirement accounts?  Are they salespeople or fiduciaries?  The truth is, neither of these professionals are bound by law to act with your best interest at heart. Getting financial advice from a sales person may cost you a lot more than just the front-loaded commission dollars.   The stockbroker, for instance, may recommend that you invest in a security when there are others that are a better choice. This is legal, as long as the recommended security meets a ‘suitability standard,’ that is, it is a suitable (but not necessarily the best) choice. This naturally creates a conflict of interest when the stockbroker stands to gain a higher fee from the second or third best choice but still ‘suitable’ security.   Brokers are not even required to provide up-front commissions and fee disclosures to their clients.  75% of financial advisors are held to this low ethical suitability standard! A fiduciary, on the other hand, is legally obliged to recommend that you invest in the security that – in their professional judgement – is the best choice for you.  Plus, all of their fees are transparent and disclosed in the initial meeting.  They are not pressured to sell any particular product and they do not receive commissions or referral fees from any outside parties.  A fiduciary isn’t necessary for every financial transaction. For example, individuals managing their own investments may be just as satisfied to buy and sell securities through a broker, and we all deal with insurance brokers who are paid on commission or insurance agents who sell their company’s products.  However, consumers should use caution when making financial transactions with someone who is not a fiduciary.  Two-thirds of advisors charge both fees and commissions so they can call themselves “Fee-based,” but they are not true Fee-Only planners.    Most of these fee-based advisors work for big brokerage firms where big commissions are still a large part of the business.   When you consult with a financial advisor who is fiduciary you can be assured of receiving the best and most objective advice for your situation. We recommend that when meeting a financial advisor for the first time, you should ask these questions: ·         Are you legally obliged to put my best interests ahead of yours? ·         Will you be serving as my fiduciary? Will you sign a fiduciary oath? ·         Are you fee-only or fee-based?  Explain your compensation method.  ·         What licenses do you hold?  A Series 7 License means the advisor is a registered stock broker.  Having an insurance license means he/she can sell you annuities and life insurance policies and accept commissions.  There is clearly a conflict of interest if the advisor has a combination of these licenses.  ·         Do you receive any commissions or referral fees? ·         Are you a registered investment advisor? As an independent fee-only firm, Horizons Wealth Management commits to acting solely in the best interests of our clients. Both Glen and I hold the Certified Financial Planner (CFP®) designation and we are also members of NAPFA, which is the country’s leading professional association of Fee-Only financial advisors.  These associations require that we adhere to the highest professional and ethical standards when advising our clients, and we work diligently to earn and cultivate their trust. Written By:  David Hunter, CFP®                    

 

You may have been hearing the term ‘fiduciary’ more often recently; consumers are increasingly aware of the fact that not everybody in the financial services industry acts in the best interest of their clients. Unfortunately, the financial and investment world is full or corruption, greed, and lack of transparency.  At Horizons Wealth Management, we have noticed that more and more individuals are doing their own research and seeking out Fee-Only advisors who adhere to a ‘fiduciary standard.’ 

So, what is fiduciary? Investors should really pay attention to this topic.  A fiduciary is someone who is required, by law, to act in the best interests of their client. Attorneys, accountants and even real estate brokers acting on a client’s behalf must act as fiduciaries. But in the financial services world, it’s not always clear who is and who is not a fiduciary.

Anyone can make the claim to be a financial planner.  The neighborhood stockbroker may call themselves a ‘financial advisor’ and be a pillar of the community. Your insurance agent may have managed your homeowners and auto policies for years, but should they be advising you on your investment and retirement accounts?  Are they salespeople or fiduciaries?  The truth is, neither of these professionals are bound by law to act with your best interest at heart. Getting financial advice from a sales person may cost you a lot more than just the front-loaded commission dollars.  

The stockbroker, for instance, may recommend that you invest in a security when there are others that are a better choice. This is legal, as long as the recommended security meets a ‘suitability standard,’ that is, it is a suitable (but not necessarily the best) choice. This naturally creates a conflict of interest when the stockbroker stands to gain a higher fee from the second or third best choice but still ‘suitable’ security.   Brokers are not even required to provide up-front commissions and fee disclosures to their clients.  75% of financial advisors are held to this low ethical suitability standard!

A fiduciary, on the other hand, is legally obliged to recommend that you invest in the security that – in their professional judgement – is the best choice for you.  Plus, all of their fees are transparent and disclosed in the initial meeting.  They are not pressured to sell any particular product and they do not receive commissions or referral fees from any outside parties. 

A fiduciary isn’t necessary for every financial transaction. For example, individuals managing their own investments may be just as satisfied to buy and sell securities through a broker, and we all deal with insurance brokers who are paid on commission or insurance agents who sell their company’s products.  However, consumers should use caution when making financial transactions with someone who is not a fiduciary. 

Two-thirds of advisors charge both fees and commissions so they can call themselves “Fee-based,” but they are not true Fee-Only planners.    Most of these fee-based advisors work for big brokerage firms where big commissions are still a large part of the business.  

When you consult with a financial advisor who is fiduciary you can be assured of receiving the best and most objective advice for your situation. We recommend that when meeting a financial advisor for the first time, you should ask these questions:

·         Are you legally obliged to put my best interests ahead of yours?

·         Will you be serving as my fiduciary? Will you sign a fiduciary oath?

·         Are you fee-only or fee-based?  Explain your compensation method. 

·         What licenses do you hold?  A Series 7 License means the advisor is a registered stock broker.  Having an insurance license means he/she can sell you annuities and life insurance policies and accept commissions.  There is clearly a conflict of interest if the advisor has a combination of these licenses. 

·         Do you receive any commissions or referral fees?

·         Are you a registered investment advisor?

As an independent fee-only firm, Horizons Wealth Management commits to acting solely in the best interests of our clients. Both Glen and I hold the Certified Financial Planner (CFP®) designation and we are also members of NAPFA, which is the country’s leading professional association of Fee-Only financial advisors.  These associations require that we adhere to the highest professional and ethical standards when advising our clients, and we work diligently to earn and cultivate their trust.

Written By:  David Hunter, CFP®