Most people start thinking about hiring a financial professional when they’re approaching retirement. But the lack of a uniform code of conduct among financial professionals allows many glorified salespeople to legally pose as trusted advisors. This episode explains how different kinds of financial advisors work and earn their living--and why these differences matter.
Guest pre-retiree Patty starts with the story of a personal finance class she attended with her husband at her local college. The “instructor” was an insurance salesperson who used the class to try to sell them annuities as the solution to their retirement income challenges.
Guest Lynne Egan, the Deputy Securities Commissioner for the state of Montana, attended a similar class and confirms that these “trolling sessions” are both common and legal. It’s the job of investors to understand the differences between a glorified investment salesperson and a fiduciary financial advisors who is committed to acting in your best interests.
Guest Phyllis Borzi, former assistant secretary of the Department of Labor during the Obama administration, worked tirelessly to introduce legislation that would have required all advisors to act as fiduciaries. Her efforts were legally thwarted by industry opposition. As a result there are no uniform standards of care among financial advisors.
Registered representatives, or brokers, earn commissions selling products, and only need to meet the “suitability standard,” which means that as long as a product they recommend generally aligns with an investor’s risk tolerance and investment objective, the broker can recommend the product that pays them the highest commission. Investors who want to work with an advisor who puts their needs first need to to ask many qualifying questions, starting with, “Are you a fiduciary?”
Legally, investment advisers are required to service as fiduciaries, which they fulfill, in part, by being paid directly by clients and receiving no commissions for managing their investments. But may investment advisers are also brokers, and can still receive commissions for selling certain products, such as insurance. Investors who want to hire “100% fiduciaries” should limit their choices to independent fee-only investment advisers who are not also brokers. Investors should also require the advisor to sign an industry standard fiduciary oath.
The latest developments in legal attempts to require all advisors to serve as fiduciaries: Link
View the most widely recognized fiduciary oath and find firms that are committed to abiding by its principles: Link
Research the background of any financial advisors to find out if they’re a broker, investment adviser or both and if they’ve ever violated securities regulations. Link
