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  • James Tharin, CFA

The First Question You Should Always Ask when Seeking Financial Advice

There has been a battle going on in Washington about how investment advice pertaining to your retirement savings will be delivered going forward. For those who don’t know about the upcoming changes – known as the Fiduciary Rule - you need to educate yourself so that you understand the kind of advice you are receiving. I don’t think most people want to be told they are getting unbiased advice when conflicts of interest exist. Let me explain: In the financial advice business there are two separate standards of client care. They are known as the Suitability Rule and the Fiduciary Standard. Let’s start by examining some differences between the Suitability Standard of Care and the Fiduciary Standard of Care.

The Suitability Rule only requires an adviser to make recommendations to his or her client that are suitable for that investor. There is no requirement under the Suitability Rule that requires the adviser to put the client’s best interest before that of the adviser or the investment firm. It just says that investment recommendations have to be suitable. So, let’s suppose an adviser operating under the Suitability Standard is evaluating two investments with similar characteristics to recommend to a client. Investment A has proven itself over time to be a superior and a lower cost option than investment B but investment B pays a higher commission to the adviser. Under the Suitability Rule the adviser can and more often than not does, recommend option B. In fact, variable annuity companies often run special bonuses in which they will, for a limited time, pay a higher commission to the financial salesperson (let’s call them what they are because they are not truly ‘advisers’) to sell their products. As a 26-year veteran of the financial services industry I have known people that actually switched the products they recommended as the special bonuses changed each month. But because they were only held to the Suitability Standard they were not actually breaking the law. But they sure were acting unethically, in my opinion.

Historically, financial salespeople have acted under the Suitability Rule. Under the North Carolina Investment Advisors Act (which does not apply to stock brokers and insurance sales people) registered investment advisers are required by law to act as a fiduciary in all advisory relationships. This means that by law, fiduciaries are required to put their clients’ best interests before their own. So, if we consider the example above with the only change being that the adviser is operating as a Fiduciary, then he or she must recommend option A unless there is an EXTREMELY good reason to do otherwise and the reason(s) for that recommendation must be well documented. I am proud to say that Emerald Asset Management has operated in a fiduciary capacity in all of our client relationships since our founding and well before the new Fiduciary Rule was on anybody’s radar.

So, when you are seeking financial advice, the first question you might want to ask the representative of the company that you are interviewing is, “Do you act as a fiduciary in ALL of your client relationships?” If the answer is “no” then you might want to consider other options. Next week's article: Who Would Fight The (Golden) Fiduciary Rule and Why?

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