There’s a lot of jargon in the financial service industry. And much of it probably flies right over the heads of most investors.
But if there’s one word that every investor should know and understand, it’s “fiduciary.”
The fiduciary standard is a set of regulations requiring advisers to always act in the best interest of their clients, to disclose any potential conflicts of interest, and to be transparent about how they’re being compensated. “Being a fiduciary is the highest legal duty of one party to another. It has a legal, moral and ethical component,” said John Allen, Market President of Argent Trust’s Greenville office.
At Argent, all of our trust advisers and registered investment advisers follow the fiduciary standard. But throughout the financial services industry as a whole, this standard is far from universal.
According to a 2015 report from the White House Council of Economic Advisers, Americans lose about $17 billion a year in investment returns due to advisers and brokers steering them toward securities that aren’t in their best interest and may include higher fees and lower returns than similar products.
The SEC has recently announced plans to expand the fiduciary standard to some advisers who currently aren’t required to follow it. And while that could be good news for investors, there may be unintended consequences.
To help understand what all of this means, let’s tackle a few big questions regarding the fiduciary standard.
Who has to follow the fiduciary standard?
To answer that question, it helps to understand the overall makeup of the financial services industry. Financial advisers are broken down into three client-facing groups: trust advisers, registered investment advisers (RIAs) and broker/dealers. Trust advisers and RIAs have been legally required to follow the fiduciary standard since 1940. Most broker/dealers are currently exempted from the requirement, though some voluntarily choose to follow it.
At Argent, providing this level of service is baked into our company culture.
“We’ve worked under the investment fiduciary standard for decades,” said Timothy Barrett, Senior Vice President and Wealth Adviser in Argent Trust’s Louisville office. “Our attitude is different. We don’t sell on performance. With many stockbrokers, they’re constantly trying to beat benchmarks, sometimes at the expense of long term goals. We sell on services and on our fiduciary responsibilities. We take good care of our client’s money and do what’s in the best interest of families.”
Why is the fiduciary standard important?
When you invest your money, you want to feel secure that your financial adviser is putting your needs before their own. Without the fiduciary standard, an adviser only has to make sure that an investment is suitable for their clients — even if similar ones might be a better fit. This is known as the “suitability standard.”
“It doesn’t have to be the best product or the cheapest product, it just has to be appropriate,” Allen says.
Some proprietary products have a variety of hidden fees attached to them that non-fiduciary advisers aren’t required to disclose to clients. They also aren’t required to disclose conflicts of interest, which could include receiving a bonus to promote a particular investment.
“A front-end loaded fund might pay the broker 6 percent up front, for example, with a small management fee going forward. Securities with a rear-end load would charge a fee when you get out,” Allen says.
Does that mean I shouldn’t invest with brokers?
Brokers have an important purpose in the financial services world, says Byron Moore, an Argent Advisor in Ruston, Louisiana. They’re often the only resource available to investors who don’t have a large amount of money, and because they don’t have the additional fiduciary requirements, their services tend to be less expensive as a whole.
“It’s a basic rule of economics. If you impose a higher cost, through increased regulation, on an industry, it’s going to show up somewhere. It could show up in reduced supply or trimmed back services,” Moore said. “There has always been a need for people to just execute transactions. Using a broker involves a lower cost, and if you’re capable of looking out for your own interest, that may be all you need.”
What do the proposed fiduciary rule changes mean for me?
If you’re a client of Argent, any changes being proposed won’t affect you at all. The current debate strictly involves the world of broker/dealers. Currently, only broker/dealers who oversee retirement plans are required to follow the fiduciary standard. The Securities and Exchange Commission wants to expand that requirement to all broker/dealers, a change that could come as early as this fall.
“I think that the regulation is well intentioned, like a lot of things, but by the time the sausage is made, it causes as many problems as it solves,” Moore says. “It helps to some degree, but a lot of it is about how things appear instead of substantively changing the playing field.”
However, any increased level of transparency is ultimately a good thing for investors, Barrett says.
“I don’t want to buy a refrigerator that’s simply marked up and could be purchased cheaper elsewhere. I don’t want that at Best Buy; why would I want that with my broker?” he says.
How can I feel secure that my adviser is looking out for my best interest?
Ask your financial adviser if they are serving you in a fiduciary capacity. If they’re not, take that fact into account as you weigh the pros and cons of investments that they suggest to you.
If you’re looking for an adviser and you don’t know where to start, your best option may be asking people you know.
“Talk to friends and neighbors you trust. Ask who they use, if they’re good, if they communicate with clients the way they want to be communicated with. I always suggest interviewing at least three candidates before deciding to work with any kind of financial adviser,” Moore says.
Ultimately, Barrett says, the reputation of an adviser or a company carries as much value as any legal standard.
“From a purely competitive side, the reputation of being ethically minded is what keeps you in business,” he says.
UPDATE: March 23, 2018
Court Ruling Leaves Some Investors Uncertain About Who is Looking Out for Their Interests
The Fifth Circuit Court, which covers Texas, Louisiana and Mississippi (all states served by Argent), recently ruled that the Department of Labor overreached when it required brokers and others handling investors’ retirement accounts to abide by the fiduciary rule. The Wall Street Journal noted that, “Another circuit court decision has taken an opposite tack, though, meaning the continuing fight over the rule could be headed to the Supreme Court.”
What does all of this legal wrangling mean for investors? Uncertainty and confusion. One way out of this legal jungle is to work with a financial advisor who has always adhered to the fiduciary standard, such as a trust advisor or registered investment advisor.