Last year my family and I had the pleasure of watching our father board an Honor Flight bound for Washington D.C. A WWII veteran, our father had not yet been to D.C. to see the memorial built to show respect to the brave men and women of his generation.
As he and ninety other veterans boarded the plane, he was surrounded by a group of volunteers who would take care of his every need for a long eighteen hour day. In fact, Honor Flights are made up almost entirely of volunteers: nurses, drivers, pilots, tour guides. These volunteers have planned every detail of the journey: transportation, medications, logistics and a listening ear. The Honor Flight program, I believe, is a great example of Americans at their best.
But as a financial services professional, I cannot help but compare Honor Flights to my own industry. I believe many people question whether or not there is any honor left in financial services. I can’t blame them for doubting. Wall Street scandals, Ponzi schemes, government bailouts and SEC violations have cast a cloud over this industry.
This raises an important question. Who can you trust with your wealth and how do you know you can trust them? I’d like to provide some food for thought on this topic.
A supportive father
My father was not a wealthy man. He was honest, hard working and diligent. He and my mother raised me and my brothers and sister with the right values. He wanted me to go to college and was proud of my career accomplishments, although I don’t think he ever really understood what I do.
When I’d come home to see him, he would often ask how work was going. Sometimes I would explain the latest project I was working on or start to talk shop a little too much. I would watch his attention gradually wane as I probably went into too many details.
He wanted to show interest, because I found the topic interesting. But I suppose his plate was already full. Between work, being a husband, father and grandfather, his mental bookshelves were stocked. I guess you could say he didn’t feel the need to know about my industry. It was enough for him that I knew.
How we communicate
This was an important lesson for me to learn early in my career. Just because something matters a great deal to me, that doesn’t mean my clients, friends or family members will feel the same.
It is important to me to find the right language, the right topics and the right level of detail to communicate with clients. I fully expect that, like my father, your plate is already full. Yet I do feel an obligation to keep you informed on important topics that can impact your family. Here is just such a topic.
You may or may not have heard the U.S. President recently speak about the difference between the two standards that determine how financial advisors serve clients in this country. Before I discuss the fiduciary and suitability standards, please allow me to explain why I believe this should matter to you.
How our clients perceive their wealth
The majority of our clients came by their wealth either through taking risk in building a business or by working hard as a senior executive in a successful company. A smaller percentage of our clients inherited their wealth.
No matter how you realized wealth, your top goal is probably preserving it. Most of our clients prefer a longer-term conservative approach over a short-term high-risk approach. They know intimately how difficult it is to build wealth.
For most of our clients, their wealth represents two very powerful things. First, it represents all of the years of hard work, risk and sweat it took to accumulate wealth. Second, it represents their ability to care for the ones they love and protect them from the uncertainties of life.
Losing wealth is tantamount to losing a portion of a life’s work and to diminishing one’s power to protect loved ones. Losing wealth is painful.
This brings me to the point of my article. The difference in the fiduciary and suitability standards for advisors could have a direct bearing on how much wealth you retain, how much risk you take and how closely your wealth plan aligns with your values. This is why you should care about this topic.
The two standards
Advisors in the financial services industry are held to two different standards: fiduciary and suitability. In general, Registered Investment Advisors, which is what we are, are held to the fiduciary standard. Brokers, insurance representatives and Independent Broker Dealers are usually only held to the suitability standard.
What’s the difference? The fiduciary standard requires an advisor to put the best interest of the client above all else. This means we have to think about what’s best for you and do that - even if it doesn’t benefit us.
The suitability standard, on the other hand, has a much lower bar. It simply requires that investments must fit clients' investing objectives, time horizon and experience. This means that advisors held to the suitability standard do not have to, by law, do what’s best for their clients, reveal conflicts of interest or disclose hidden fees that benefit them by way of commissions.
What I’m not saying
I want to be clear about something. I am not saying that all advisors who are held to the suitability standard are poor advisors or are unethical. I do not believe that is true. I have many friends who serve clients under the suitability standard and I know they are doing their very best for their clients.
However, if I’m being honest, the suitability standard leaves the door wide open for all sorts of things that I don’t believe should be allowed in this industry. If we are ever to achieve a level of honor and respect, as an industry, that I believe we should achieve, the fiduciary standard should become THE standard.
How the standards effect compensation
One of the most important differences between the fiduciary and suitability standards concerns how financial advisors are compensated.
In the fiduciary model, compensation is based on the performance of the assets under management. Clients pay a reasonable fee based on a percentage of assets managed. If those assets go down in value, due to poor advice, a market decline or any other reason, the advisor’s compensation goes down as well. This gives the advisor incentive to ensure the assets are well managed in accordance with their clients’ needs and objectives.
In the suitability standard, fees are charged for financial products based on transactions. A financial advisor “sells” a product to a client and earns a commission. If that asset loses value, the advisor does not feel the financial sting. In fact, the advisor is incentivized to sell the client a new product.
The implications to you are as follows:
- We have no incentive to churn your investment portfolio or make risky moves.
- We have every incentive to watch your investments over time, long after we’ve recommended a given financial product.
- Our compensation is tied to long-term performance, just like your assets.
- We are responsible to deeply understand what you want to see happen with your wealth and build a plan to accomplish that. By law, we must do exactly that.
My position on this topic
As the President of Whitnell, I would like to see the financial services industry recover a position of trust, respect and honor. The damage done to our craft is disappointing, even if it was only done by a handful of people.
I believe the adoption of the fiduciary standard for our industry will go a long way toward restoring confidence in the integrity of financial advisors in general. I believe that what we do is indeed honorable and of critical importance to our clients and the nation.
As an American and the son of a World War II veteran, I believe in honor and responsibility – virtues that can seem all too distant today. I see our role as financial advisors much the same as the volunteers who attended my father’s Honor Flight. We exist to give flight to your dreams. We seek to serve you and to protect you and your family along the journey.
If you share these values, I encourage you to give voice to this topic. Tell your friends or pass along this article. The winds of change are blowing. And they favor families like yours and mine.
The information contained in this article is provided for informational purposes only. No illustration or content in it should be construed as a substitute for informed professional tax, legal, and/or financial advice.