Why An Investment Fiduciary Over A Broker/Dealer Salesperson

Updated: Nov 15, 2019



Fiduciary is an unfamiliar term to many in the world of personal finance and understandably so. For decades large national financial brokerage sales firms have recruited young college graduates as sales recruits to farm their friends and families circle of influence with the sole purpose of selling them the company’s products. Many broker/dealers do this with full knowledge that 95% of the newly minted sales recruits won’t make it past the two-year training period, and making matters worse, hiring decisions are largely made on how robust the recruits contact list is.


The broker-dealers even have a term for this called “internal consumption”, which begins when the new hires must make a list of at least one hundred people that they know, beginning with family, neighbors, friends, college buddies, friends from church, and anyone else who will take a phone call from the recruit.

The recruits must go out and get a meeting to pitch the product to an unsuspecting friend or relative who are usually surprised to learn they have been invited to a sales pitch for life insurance, mutual funds, annuities, REITs, or something else that might be the hot commission product of the moment.

Let’s be honest, we’ve all had that call from our ne’er- do-well relative, nephew, or from some neighbor’s kid who just got out of college and can’t wait to share with us some great “financial information” from their new company. If you go to that meeting keep in mind that the recruit has a VERY low statistical likelihood of working for his firm for longer than 24 months.


Unfortunately, much of the financial industry operates in much the same way as the counter-intelligence world in what is known as a “wilderness of mirrors” – which is, creating a chaotic information environment that so perfectly blends truth, half-truth and fiction, that even the best can no longer tell what’s real and what’s not.

Why? - So that investors will be intimidated or confused and hand over their money to the Wall Street broker-dealer establishment. While this is great for the broker-dealer financial services industry, it’s not so great for the average American family.

Larry Stein recently wrote in Market Watch that You may not realize some things about your new advisor and his blue-chip firm. Your advisor may:

  • Not always place your interests ahead of his own

  • Have conflicts that influence the advice he gives

  • Collect fees on investments he selects for you that are much greater than you expected



Fiduciary vs. Suitability Standard

How can this be possible? How can an advisor not put your interests first? Here's the truth: Many financial advisors are not fiduciaries; they are essentially brokers who are subject to a "suitability" standard. With suitability, the SEC says the financial advisor "must have a reasonable basis for believing that the recommendation is suitable for you." This is a much lower standard than being a fiduciary, which demands that the advisor place his clients' interests ahead of his own. This may not look like much of a difference, but it's huge.

Here's a typical example: Suppose an advisor can either sell a high-commission product or recommend a no-commission fund, both of which are suitable for the client. The fiduciary advisor will always choose the no-commission fund, because he always puts the client's interests ahead of his own. But the non-fiduciary advisor could go either way because both products are suitable. Of course, the client will probably be worse off if the advisor selects the high-commission product since the added costs — often in the 3%-6% range — tend to reduce total investment returns.

Think of it: You invest $1 million, your advisor makes $60,000 in an instant (based on a 6% commission), and you're worse off. Yet his conduct is just fine under the suitability standard since the investment was suitable for you. That’s why you should always invest your hard-earned money with an advisor who operates according to a fiduciary standard. Your interests should always come first.

In its published proposal the DOL requires that "retirement advisors put the best interests of their clients above their own monetary interests." The proposal also seeks to protect investors from conflicts of interest, particularly "backdoor payments and hidden fees often buried in the fine print." It sounds like an ugly situation that needs fixing, right? Yet, the government is facing heavy resistance from large investment firms who are against this proposal — they want to keep things just the way they are.

Watch out for dual registrants

As with most things in the investment business, the term "fiduciary" can have shades of gray. A financial advisor may serve as a fiduciary for some transactions and "switch hats" to act as a broker on others (subject only to the suitability standard). It sounds crazy, but it's actually very common.

According to a FINRA study, 88% of investment advisor representatives are also registered as brokers! These are what we call dual registrants. They can engage in "hat switching," serving as a fiduciary on one transaction (typically a no-commission fund) and a broker on another (usually a commission product).

As you can see, it can be difficult to tell which advisors always adhere to a fiduciary standard. We believe it's unconscionable that all advisors do not operate according to a fiduciary standard, whether they serve the retirement plan market or not. At least in retirement plans, your employer is supposedly looking out for your best interests. But, on personal accounts — such as your family portfolio and IRA — who is looking out for you?

  • Ask your advisor: "Do you always act according to a fiduciary standard? Are you legally bound to act in my best interest?"

  • Look at the advisor's documents: Is the advisor's adherence to a fiduciary standard clearly stated in writing?

  • Look at your account statements: Make sure you are not invested in proprietary funds (created or sponsored by the advisor's firm) or products that charge commissions when your objective could be just as effectively met by non-commission funds.

The good news is that there are plenty of great firms who are Holistic, Unbiased, and adhere to a Fiduciary standard.


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281.466.4843
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