Embracing the Fiduciary Standard

Federal law requires that SEC Registered Investment Advisors be held to a Fiduciary Standard. This means that an advisor must act solely in the best interest of the client, even if that interest is in conflict with the advisor’s financial interest. Investment Advisors must disclose any conflict, or potential conflict, to the client prior to and throughout a business engagement. Investment Advisors must adopt a Code of Ethics and fully disclose how they are compensated.

Unfortunately, only a small proportion of “financial advisors” are federally or state-registered Investment Advisors. Most financial advisors are considered “Broker-Dealers” by the United States Securities and Exchange Commission (SEC). They are held to a lower standard of diligence on behalf of their clients. In fact, they must be “fair and suitable” in their recommendations, but have no legal obligation to put your interest ahead of their personal or firms interest.

Morris Financial Concepts, Inc, has always embraced the Fiduciary Standard. Putting our clients best interest first isn’t a legal burden on us; it is a logical extension of the relationship we build with each client.

A Financial Planner held to a Fiduciary Standard occupies a position of special trust and confidence when working with a client. As a fiduciary, the Financial Planner is required to act with undivided loyalty to the client. This includes disclosure of how the Planner is to be compensated and any corresponding conflicts of interest.

As first heard on the radio broadcast of South Carolina Public Radio business review with Mike Switzer in an interview with Tucker Morris:

“The Fiduciary Standard vs The Suitability Standard

If you are working with a broker / dealer they must comply with the suitability standard.  The suitability standard means they can only sell you securities (stocks, bonds, mutual funds, etc) that match your financial needs and objectives.  What the suitability does not cover however, say is how much those things cost.  The broker does not need to disclose this information to you, and as long as the security he sells you “matches with your financial needs and objectives” it could potentially cost you more than another security that he doesn’t make any commission on.   In other words, the non-savvy investor should be very wary of transacting with broker dealers, because they can place their own interests ahead of yours.

On the other hand, Investment advisors are held to the fiduciary standard.  It is illegal for an advisor not to disclose to you any important conflict of interest. Investment advisors must put your interests ahead of their own.  If there are two stocks or mutual funds that are suitable for you, they cannot purchase the one that puts more money in their pocket – at least not without disclosing that to your first!  Still be careful with investment advisors though – they often disclose their conflicts of interest in the ADV brochure– so check that out if you have an investment advisor.  The ADV Brochure for Morris Financial Concepts, can be found here.  Investment advisors are actually required to send that form to you yearly if there are any changes to it.  These brochures are written in plain English and are often not written by lawyers or in legalese.

Most often investment advisors will make money on flat or hourly rates, or charge you a percentage of assets under management.  The “Percentage of assets” actually makes our incentives align perfectly with yours.  Think about it.  If you have 100 thousand dollars to invest and I charge you 1%, I make 1000 dollars a year.  If we invest your money wisely over time, and managed to turn your $100,000 into $200,000 on that horizon, then we just gave ourselves a raise, we got you more money. Everybody wins.

The bottom line is brokers make money by selling you stocks, bonds etc.  Investment advisors make money by selling you advice and implementing those suggestions.  Which do you think has your best interests at heart?

Where do financial planners come into the picture?

CFP®’s look at your whole financial picture, and give you advice taking the following into account:

  • Your age, your marital status,
  • how much money you are making and are going to make,
  • when you want to retire,
  • do you have kids? Do you want to send them to college?,
  • are you insured enough.
  • What is your tax situation?
  • See our financial planning process page for more information about the steps we take to ensure your financial well-being.

They compile all data these things,  learn what your financial goals are, make recommendations, and help you implement and monitor those recommendations.  They will help manage your investment assets, but this is not necessary, but they will want to meet with you regularly over the years to make sure you are on track with your goals and that those goals haven’t changed.  Financial Planners are usually registered as investment advisors either with the state or the SEC.

There are two types of financial planners – fee only and fee based. Fee based financial planners sometimes will sell you investment or insurance products that they make a commission off of, as well as charge you a flat rate.  They have to disclose that they are making money off this product and tell about alternative products and why theirs is actually better. On the other hand, fee-only planners do not make commissions off of any investment products, but solely give you advice for a fee. A good fee only financial planner will tell you whether you are insured enough, if you are not, they can help connect you with a good Insurance broker that they don’t receive a kickback from.

At Morris Financial Concepts, we like to say that as fee only planners we sit with you at the table, not across from you, and help to align your core values, life goals, and financial resources to create an enriched life.  We want you to Live and Love Life.  After All, Financial Health, Financial Wealth – It’s more than money.