Your Best Interest in Mind?Submitted by AssetGrade, LLC. on April 11th, 2017
Submitted by Kate Hennessy on April 10th, 2017
Many of you have seen the commercial on television where a son asks his father about his advisor’s compensation. After a short pause; the father responds “I don’t know…” There are many similar advertisements and hopefully they resonate with investors because it is important to know how your advisor is compensated.
Is your advisor truly working in your best interest or are they receiving a large commission for a recommendation you were not aware of? It’s important to choose your advisor wisely and understanding what it means to be a fiduciary is the first step.
The simplest definition of a fiduciary is one who holds an ethical and legal relationship of trust with one or more parties. One would think in the investment world that everyone should act as a fiduciary, however not everyone holds themselves to the highest standard of care to act in the best interest of their client.
In addition to acting in their client’s best interest and being upheld by law to do so, fiduciaries should avoid conflicts of interest – fiduciaries may not recommend proprietary funds or receive indirect payments from investments in the plan.
Forty plus years ago the DOL (Department of Labor) released its fiduciary standard test – a five-part regulatory test that defined and applied to fiduciaries.
Fast forward to 2017 and the new DOL Fiduciary Rule was to be implemented in April, but was delayed 60 days. Once the rule is phased in investment professionals will have to live under tighter controls when advising on IRAs and 401(k) plans. This means that some investment professionals will be part-time fiduciaries - they still might not be fiduciaries for non-retirement (e.g., brokerage) accounts.
The new rule and protections are not in place yet. In the interim if you want to determine if you can trust your advisor to act out in your best interest - ask your advisor if they are a fiduciary all of the time. For example, the same advisor may be a fiduciary for one type of an account (e.g., and IRA) but not a fiduciary for another type of account or financial product (e.g., brokerage account or annuity). When researching potential advisors it’s important to examine their two government forms, ADV Forms I and II, and their credentials. It’s a great opportunity to educate yourself on your advisor’s actions, compensation and intentions.