Finding Advisors Committed to Ethics

JULY 20, 2017
Eric C. Jansen, ChFC®
                                                                                              

Physicians, ever mindful of the Hippocratic oath, might assume that all professionals adhere to uniform and ethical standards of client care.

When it comes to the financial advice industry, that assumption might not always be accurate.

Financial advisors work under one of two different standards of care. Some, at times, may follow a standard that many dental care providers would find surprising, if not appalling. It’s called the suitability standard, and broadly stated, advisors’ recommendations under this standard must generally be consistent with their clients’ best interests. Sounds good, right? Not necessarily. The devil is in the details.

Specifically, advice rendered under the suitability standard is considered incidental to the sale of financial products, and the recommendations advisors make must be suitable for at least some investors. This means that as long as an investment fits the needs of the client in some way, the advisor is free to recommend an investment that pays said client the highest commission or fee, even though this may mean higher expenses for the client. In the end, advisors can ironically recommend what is the least suitable option as long as it satisfies this narrow suitability test.
How’s that for a conflict of interest? In many instances, product sales, instead of unbiased advice and guidance, drive the advisor-client relationship.     

The other standard of care is the fiduciary standard. Akin to the Hippocratic oath, this standard requires advisors to put their clients’ best interests ahead of their own. For instance, faced with two identical products but with different fees, advisors under the fiduciary standard are compelled to recommend the one with the least cost to the client, even if it means less compensation for themselves and their firm. This is the standard of care many physicians might assume their advisors are operating under, but often that’s not the case.  
 
So why are there two standards anyway? The answer lies in how the financial advice industry is structured. There are currently far more commission-based advisors than fee-based advisors. Typically, financial advisors in the U.S. are product-centric, commission-based brokers or sales reps who work under the auspices of the roughly 3,800 broker-dealers that distribute both proprietary and non-proprietary products to consumers through their financial advisor/registered representative sales forces.

A battle is ongoing over this very issue, involving the Department of Labor (DOL) the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the financial services industry and consumers.

New regulations that would impose the fiduciary standard on all advisors have been proposed by the DOL for advice that involves qualified retirement plans, including IRAs and 401(k) plans. Predictably, this change is being contested for various reasons. Some provisions of the regulations became effective in June, and the rest would take effect January 1, barring further delays or repeal. That’s a start, but time will tell whether the new regulations become fully enacted.

In the meantime, you can get a clue as to which standard an advisor is operating under by determining how he or she is paid. If you’re currently receiving financial advice at no charge ­– in exchange for purchasing financial products from your advisor – then he/she is most likely working under the suitability standard. Further, busy physicians can save time by directly asking advisors outright which of the two standards they operate under.

The best chance of engaging an advisor whose compensation structure and standards of care are aligned with your interests is to hire one who goes by the fiduciary standard and whom clients pay a fee for advice (assuming they’re qualified to give it). For starters, look for designations such as a Certified Financial Planner (CFP®) or Chartered Financial Consultant (ChFC®).

Eric C. Jansen, ChFC®, is the founder, president and chief investment officer of Westborough, Mass.-based AspenCross Wealth Management, which provides fee-only retirement-income planning and investment management services for high-net-worth clients nationwide.   

Registered Representative/Securities and Investment Advisory Services offered through Signator Investors, Inc. Member FINRA, SIPC, a Registered Investment Advisor. AspenCross Wealth Management is independent of Signator Investors.
 

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