A common phrase we all hear today is “I put my clients interests first”. Well, do they actually? Are they just saying that or is there a governing body giving them oversight to ensure they are actually putting clients interests first?
There is one term that is used to show a person actually puts their client’s interests first, Fiduciary. What does that mean? Well, according to SmartAsset a fiduciary is “is an individual organization who manages assets on behalf of another person or entity. Fiduciary financial advisors hold a relationship of trust with their clients and abide by fiduciary duty. Fiduciary duty is the ethical obligation to act in someone else’s best interest”. To put it simply, a fiduciary is someone who puts your interests above their own and must always act in your best interests.
Why does that matter? In my previous blog, I lightly touched on how the industry used to work in regards to commissions. If I am getting one big upfront commission, what is my incentive to work with you going forward ensuring your goals are being met? You were heavily compensated upfront and possibly not sitting on the same side of the table as the client and working in their best interests. What is the historical picture in your mind of financial advisors or what do you think pops up when you google them?
In a fee-based world, you are compensated based on a mutually agreed-upon fee that continues throughout the relationship. By having the advisor compensated in the fee-based world, they are incentivized to continue working with you constantly and putting your goals first. This also reduces conflict of interest in product selection. Historically there have been specific products that advisors may have been more willing to use simply because the upfront commission they were getting was higher. Would you rather have an advisor heavily compensated upfront or an advisor with a transparent fee structure that benefits the client more as their account grows larger? Personally, I want transparency. Think about when you enter a restaurant and there are no prices on the menu, what is your first thought? Mine is: “this one is going to hurt”.
Personally, I am a fee-based advisor with no ability or desire to charge commissions to my clients. The SEC is my governing body and I additionally adhere to the prestigious CFP Board. I must complete hours of continuing education while also held to a legal standard of fiduciary duties.
Hey Steve, great information…but why do I care?
When it comes to money management and financial planning you want someone always on your team. You want them to be able to prove it, not just use it as a slogan to attract more clients. This is your money, you have saved this over your lifetime and these are your goals. Would you like someone to get paid a large commission upfront or someone that has the incentive to continue working with you for years and is held to a legal standard to act in your best interest?
Think about it.