Thank you to Action Point Financial, and Lucy Shair, for allowing us to reprint this great information for you. Lucy, in addition to being an Unstoppable Women's member, is a fee-only fiduciary financial advisor at Action Point Financial. She loves helping her clients gain control of the finances to improve their lives and build a better future. She especially enjoys working with women and focusing on their specific needs. For more information about Lucy and Action Point, check out their website at www.actionpointfp.com/lucys-bio.
The first phase of the Department of Labor’s “Fiduciary Rule” has been in effect for about a month now. This topic has been in the news a lot lately, so you probably have some idea that your financial advisor should be a fiduciary.
The author of this Forbes article thinks that regardless of the rule’s legal future, consumers will hold their financial advisors to it, and I agree. You have been enlightened, and now I hope you will accept nothing less than your best interests as top priority. You already demand this level of care from your doctor and accountant so when your life savings are at stake, you should absolutely expect the same standard of care and ethical duty.
But what does it mean exactly, to be a fiduciary?
Essentially, a fiduciary is a financial advisor who is required by law to act in the best interests of the client. But there’s more to being a fiduciary than meets the eye. It’s not just a label you can slap on. Only one kind of financial advisor – one who acts exclusively as a Registered Investment Advisor or “RIA” – is required to act as a fiduciary at all times. That little three letter word “all” is really important.
It is possible, and increasingly popular, for financial advisors to be dually registered, meaning sometimes they wear a fiduciary hat to provide investment advice while at other times not; getting commissions through an affiliated broker-dealer on other investments. So the question to be asking is not, “Are you a fiduciary?” but rather
“Are you required to act as a fiduciary at all times?”
These dually registered advisors are blurring the distinction between broker and advisor, which can be confusing to investors. Other key differences between these two approaches include the following:
The fiduciary standard goes beyond the traditional requirement that broker-dealers “reasonably believe” the recommended investments to be “suitable” for the client, based upon their needs, objectives and circumstances. The broker’s duty also remains to the broker-dealer by whom she is employed, not necessarily to the client. To make matters worse, many of these broker-dealers are publicly traded companies which means their duty remains to the shareholders. The fiduciary standard requires RIAs to maintain a “duty of loyalty and care” to their clients, which means the advisor is required to be on your side, regardless of whether it makes her, or her employer, more money.
The essential difference between the suitability and fiduciary models is their primary focus: a product vs. client orientation. The licensing requirements for these two professions back this up. A broker is trained and licensed primarily to be a salesperson and has a Series 7 license to sell a product. An RIA, however, maintains a Series 65 license to provide investment advice.
I can hear you protesting as I type these words - “But my Financial Advisor is a great guy!” or “We’ve been with XYZ Brokerage forever… of course they’re looking out for us!” I am not saying your Financial Advisor isn’t a great guy, or that you haven’t had good service from your brokerage. But the bottom line is that under the fiduciary standard, an advisor working with an RIA would be prohibited from putting your money in an investment from which she would receive a higher fee because it would cost *you* more money. The great guy at your brokerage would not, as long as that was one of many investments deemed suitable for your situation. In fact, a broker might even be incentivized to invest you in his brokerage’s products because he earns a higher commission on them, regardless of whether they are the best choice for you.
Another byproduct of the sales or transactional orientation of most brokers is that once the sale is completed and they’ve received their commission, you may not hear much from them. I often hear people say they “feel like a number” or don’t hear from their financial advisor regularly which makes sense when you think about it - if they’ve already received their compensation and are not bound by a fiduciary duty to keep working in your best interests, why would they call more than they need to?
Unless you’re an investor with a lot of assets, it is not cost effective for them to spend time on you. This is often true for many RIAs, as well, because they tend to be paid a fixed percentage of the invested amount. This is why many investment management firms have minimum account sizes that exclude less profitable clients.
Which brings us to another problem in the scope of advisor compensation: in a compensation structure where everyone is moving to fee-only, and those fees are required to be “reasonable,” who is the arbiter of reasonableness? If everyone is charging around the industry average of 1.00% - 1.25% of assets under management – and we may see that increase as advisors seek to make up for lost commissions – investors don’t have many better options. So it turns out a fiduciary can act in your best interests, but still charge too much. Sometimes WAY too much!
I don’t believe in minimums either. I currently help investors that range in size from just getting started to tens of millions. If you’ve got a little to invest, I want to steer you in the right direction. If you’ve got a lot, I want to help you avoid expensive mistakes. I want to help you enjoy your life and save responsibly for the future.
The problem with this assumption is two-fold.
First, this industry average range of 1.00-1.25% AUM is antiquated and has not adjusted for the current environment. As returns on money markets, bonds, and other fixed income based assets have come down over the years, advisory fees have actually gone up according to leading research firm PriceMetrix.
The second problem is that “reasonableness” has historically been defined by, and interchangeable with industry-average. In other words, the financial services industry itself has been the arbiter of reasonableness. That’s right, the industry that is incentivized to make as much profit as possible is the same group that gets to determine what is reasonable. So while the fiduciary rule is a nice step in the right direction, it doesn’t go nearly far enough. Investors not paying attention are still likely to lose large amounts of money, just now in the form of annual fees instead of commissions.
Keep in mind this does not even include the expenses associated with investment funds in your accounts, or any transactional costs. If you think that’s too much – and you should – what are your options?
I believe that in the future, clients’ expectations should drive down the industry average AUM fee, and rightly so. There’s no surprise that what I advise you to seek is what I offer: transparent, low cost, fiduciary investment advice.
How Do You Find a Great Financial Advisor?
First, look for a fee-only advisor that acts as a fiduciary at all times, with all of your money. Remember that the new rule only addresses retirement accounts right now. So when it comes to any non-retirement money, including college savings, inheritance, etc. most advisors will still not be acting in a fiduciary capacity.
Second, look for an advisor that is dedicated to transparency, who will candidly discuss with you how she gets paid and how that impacts your investments. The more forthcoming an advisor is with you on these matters, the more likely she is to be truly operating in your best interests.
Finally, look for an Advisor with a lower cost structure. Many firms have no flexibility when it comes to their AUM rates – these may tend to be part of big banks or franchised by a larger corporate entity – but some firms do. Ask to see the Advisor’s fee schedule and ask whether there’s any flexibility in those rates.
As an example, our clients prior to arriving at Action Point almost always paid at least 1% with many between 1.20% - 1.30%. At Action Point, every client pays less than 1% for investment management. We pro-actively seek to set each client’s fee as low as possible. When compared to the “reasonable industry averages” we can typically offer fee reductions of up to 20-40%!
Of course, lower cost cannot be the *only* thing you consider. Investors can and should be looking at both reasonable cost and value in exchange for cost.
The future is now. Make sure that you are working with a fiduciary financial planner that is dedicated to a transparent, low cost fee structure that’s always well below industry average, regardless of your investment balance.
At Action Point, weI charge less because I we can, and because it’s the right thing to do. We are all fiduciaries, all the time, which means we’re always working in your best interests and with no commissions on investments, ever. And we don’t believe in minimums, either. If you’re just getting started, I want to steer you in the right direction and help you build good habits. If you’ve got a lot to invest, I want to help you avoid expensive mistakes. I want to help you enjoy your life and save responsibly for the future.