Working with a financial advisor is kind of like working with a counselor. There needs to be absolute trust and honesty between you in order for the relationship to work. If you don’t fully trust your counselor, or your counselor isn’t completely honest with you, then you’re not going to get the results you want.
To do things right, you need to be comfortable laying everything bare – both your finances, and the things that are most important to you.
Unless your advisor knows – and understands – what you really want to accomplish, they can’t help you plan appropriately. It’s one thing to say you need about $100k of income a year in retirement. It’s a completely different thing to help you figure out how to get what you truly want out of retirement.
This can’t happen without trust.
The problem is, most of the financial services industry – and many people who call themselves financial advisors – make this extremely difficult.
There are two basic legal standards that financial advisors operate under:
- Suitability Standard
- Fiduciary Standard
Talking about the legal standards financial advisors operate under may seem pretty inside baseball, but it’s crucial to understanding how an advisor will work with you.
What Is the Suitability Standard?
The suitability standard is a salesperson standard. It basically says that they have an obligation to know their client and not sell them something that is objectively unsuitable. In other words, they can’t invest all of an eighty-year old’s money in that hot new IPO.
Notice that it doesn’t say anything about making sure the advisor is acting in your best interest, just that they can’t do anything “unsuitable.” In other words, not only is the bar pretty low, it’s also extremely vague.
That’s not really a problem – until someone doesn’t understand the situation.
If you walk into a Ford dealership, the salesperson probably isn’t going to tell you to buy a Toyota, even if it’s the best choice for you. They want that sale, so they’re going to try to convince you that the Ford they have on the lot is the right car for you – and you can drive it home today.
They may try to help you figure out the best Ford for you (rather than the one that gets them the biggest commission check), but that’s as far as they’ll go. That’s their job, and everyone understands that about car salespeople.
The problem is that many people in the financial services industry are trying to muddy the waters. They want you to think that the nice person you’re talking to in a Scottrade office is looking out for your best interests.
Yes, the advisor’s probably a really nice guy (it’s a hard job if you don’t enjoy talking to people), but he isn’t there solely to help you. He’s there to help his employer. He’s not a malevolent person who wants to hurt his clients – in fact I’m sure the vast majority of people operating under the suitability standard want to do everything they can for their clients.
Most people want to help other people. I know some people who operate under the suitability standard who are incapable of not doing everything possible for their clients. But relying on the kindness of strangers doesn’t work when you’re talking about your retirement.
What is the Fiduciary Standard?
The alternative to the suitability standard is the fiduciary standard, which says that you must act in the best interests of your client. You have to put the client first.
This allows financial advisors to actually be advisors. They aren’t worrying about what the triple commission fund is this week, or who sends the nicest gift baskets. They are focused on what’s right for you – what will give you the best chance of reaching the retirement you want.
This matters.
A lot.
So Who Are the Bad Guys and Who Are the Good Guys?
There are no bad guys and good guys here. The fact that someone operates under the fiduciary standard doesn’t make them always right. And something suggested by someone who uses the suitability standard isn’t automatically wrong.
But you need to be able to trust the advice you get from your financial advisor. And only advisors that adhere to the fiduciary standard can guarantee they will always act in your best interests.
To do real financial planning, an advisor needs to see the totality of your situation. The fact is, most people who use the suitability standard simply cannot.
Their obligation is to their employer, not you. The advisor and their employer aren’t making money unless they’re selling something. If you’re always on guard against the next pitch your advisor will throw at you, it’s hard to build the level of trust a real advisory relationship needs.
If you’re simply looking for an order taker, then it doesn’t really matter whether a prospective advisor is a fiduciary. But if you want someone who will help guide you toward the retirement you’ve always wanted – without thinking of their own paychecks first – look no further than a fiduciary advisor.
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