FIBS. This acronym stands for the Fees, Investments, Business Models, and Services that make up the maze of the financial and retirement planning industry today. It has become an industry that is overly complicated and at times dishonest due to advisors not being up-front about plan options and what their duty is to you, their client.
As a result of the increasing murkiness in the financial services industry, President Obama recently threw his support behind the Department of Labor’s effort to create more uniform, firm rules that ensure that financial advisors are acting in their clients’ best interest. Dave Michaels wrote an in-depth report in Bloomberg covering this decision. Whether this creates a wave of change in the industry or not, it’s beneficial to know what standards advisors are held to to ensure that you get the service you deserve!
Senior editor Megan Leonhardt quoted President Obama in an article for Wealth Management,
“Outdated regulations, legal loopholes, fine print, makes it harder today for savers to know who they can trust. Financial advisors absolutely deserve fair compensation for helping people save for retirement and helping people manage their investments — but they shouldn’t be able to take advantage of their clients.”
According to a report in February from the White House Council of Economic Advisors, it is estimated that the aggregate annual cost of conflicted advice is about $17 billion each year. Further, a retiree will lose an estimated 12 percent of the value of his or her savings if drawn down over 30 years when rolling over a 401(k) balance to an IRA at retirement if they receive conflicted advice.
What does this mean? It means that advisors who are not acting in their clients’ best interest are costing people a serious chunk of change.
Fiduciary vs. Suitability Standard
In the financial world there are two main types of parties that offer investment advice to individuals. They are very distinct from each other in that they adhere to contrasting standards. There are investment advisors, who adhere to the fiduciary standard; and then there are broker-dealers, who adhere to the suitability standard.
- Fiduciary Standard: Under the fiduciary standard, investment advisors are required to place your interests above their own. They give unbiased advice that will benefit you. Under this standard, advisors are not allowed to make trades that will bring them a higher commission. They are required to gather complete and accurate information and let you know of any potential conflicts they may arise. Essentially, the idea here is loyalty and care for you (the client) and you only.
- Suitability Standard: Broker-dealers who adhere to this standard are only required to make suitable recommendations for their clients. This means that they do not necessarily have to act in your best interest. They only have to ensure that they have to believe their recommendations are aligned with your needs and objectives. Brokers are loyal to the broker-dealer they work for and not necessarily to you.
Conflicts often occur when an advisor doesn’t have a responsibility to act in your best interest. As financial professional Ryan Fuhrmann writes in an article for Investopedia,
“Under a fiduciary standard, an investment advisor would be strictly prohibited from buying a mutual fund or other investment, because it would garner him or her a higher fee or commission. Under the suitability requirement, this isn’t necessarily the case, because as long as the investment is suitable for the client, it can be purchased for the client. This can also incentivize brokers to sell their own products ahead of competing products that may be at a lower cost.”
When your interests are not aligned with the financial professional you’re working with under the suitability standard, it can end up costing you more than necessary. It’s beneficial to make sure you’re on the same page about your financial objectives and their responsibility to you as an advisor before making any big decisions!
Ride for the Brand
In our very first post for Two West Advisors, we talked about this concept of Cowboy Ethics and “riding for the brand.” Simply put, this means putting our clients’ interest and that of their employees above all else with complete transparency as independent Registered Investment Advisors. And not just because it’s our fiduciary duty to do so — because we want to!
Although the industry can be a complicated maze of FIBS, I believe that there is also a lot of good going on in the space when it comes to advisors who act in their clients’ best interest. Hopefully whatever changes are made in the future will continue to affect the industry in a positive way. As for Two West Advisors, we will continue to strive to take the road less traveled and ride for the brand!
What do you think about the proposed changes for the financial industry? Tweet @TwoWestAdvisors to join the conversation!