The financial services marketplace is huge. There are hundreds of thousands of financial advisers in the United States alone. And among these advisers, there are countless accreditations, degrees, areas of specialization and levels of competence.
For someone outside the financial services industry, this sea of advisers might resemble a collection of baseball cards. Without in depth knowledge of pricing, scarcity and quality, they’d all look the same and you’d have no way of determining their relative value.
So where do you even begin to try and sift through all these advisers to find the right one for your situation? Some qualities you can assess for yourself. Is this person knowledgeable? Are they really listening, or are they pushing you towards a foregone conclusion? But to evaluate the more complex factors, it’s helpful to understand some basics about the advisers in the industry.
Minimal standards are required to practice
The bar to legally call yourself a financial advisor is astonishingly low. In order to provide financial advice, sell insurance or buy and sell securities professionally, you simply have to pass one or more industry exams. These exams test your knowledge of the law and almost nothing about your actual abilities, and typically require just 20-30 hours of study to pass. No advanced degree needed, or even a high school diploma.
Compare that to a practicing attorney. Earning a Juris Doctorate (“J.D.”) requires three grueling years of law school, after which you must then pass your state’s bar exam, which is often even more demanding. In other words, it takes a significant personal and financial commitment, as well as technical excellence, to become a lawyer. So, when you hire one, you know at a minimum that they’re committed to their profession and have gone through a tough vetting process.
Credentials mean technical ability, not a commitment to you
Lots of advisers operate as broker dealers, whose primary service is buying and selling investment products, but their business card will say financial adviser, nonetheless. There are many more specialized credentials one can earn, such as Chartered Financial Analyst, Certified Financial Planner, or a Certified Public Accountant license. These are valuable distinctions that demonstrate an adviser’s technical ability and commitment to their craft. But the reality is that even if an adviser is well-educated and has an impressive list of credentials, a client shouldn’t take any comfort from them if the adviser isn’t practicing as a fiduciary.
Fiduciary vs. suitability standard
For a financial adviser to be registered as an investment adviser (fiduciary) by the SEC, they must demonstrate that they always act in their clients’ best interests in all investment and financial planning recommendations. A fitting analogy to fiduciary financial counsel is the experience you have with a trusted physician. She knows your family history intimately, conducts examinations, tests and analysis to identify risks, and meets with you to review the results and answer your questions. And perhaps most importantly, she brings a comprehensive understanding of your existing conditions to bear on any potential treatment options she discusses with you. This level of in depth knowledge about your unique situation and a fully integrated approach to providing financial services are hallmarks of fiduciary counsel.
The other category an SEC licensed financial adviser can fall into is a broker. Brokers must meet the lower standard of suitability, which requires providing investment and planning recommendations that are suitable for the client’s stated objectives. The suitability standard (recently amended to “best interest”) is basically the good enough standard. Unfortunately, most investment, insurance and planning recommendations made by a broker would not violate the suitability standard unless they were outright scams. For instance, a broker could, and they often do, recommend a mutual fund sold by the investment bank he works for in order to earn a commission and points towards his sales quota. Further, this fund could be more expensive and provide less relative value than other comparable funds, and the recommendation would still fall within the suitability guidelines. The experience a client might have with a broker is more analogous to someone walking onto a car lot – the salesman will always have something suitable for you. It might not be at the best price or APR, and they might convince you to upgrade to a more expensive option than you budgeted for, but if you want a car, they’ll find you one.
For investors seeking an adviser who is truly on their team, there is a gap wider than the Grand Canyon between the fiduciary and suitability standards. It’s vital to know which standard an adviser operates under when you are deciding who you want to work with. It’s also worth noting that there are advisers operating as hybrids who are registered as both investment advisers and brokers. Such advisers can be tricky to work with as the responsibility falls on the client to determine which hat they’re wearing when they’re giving advice.
Fiduciary counsel means that the adviser is legally required to create strategies, portfolios and planning recommendations that serve the client’s goals. Working with a fiduciary means you can trust the recommendations they’re giving you because they are aligned with your goals, the conflicts of interest are greatly reduced, and their fee structure is highly transparent. The suitability standard that brokers operate under is ripe with conflicts, and their fees are often obfuscated and not aligned with the client’s best interests. Another way to think about it is that an investment adviser works for you, while a broker works for the institution that employs them.
We know that for a client to get real value from their adviser, they must be confident that their adviser is not only highly proficient, but 100% committed to helping them achieve their goals. That is the guiding principle of our firm and how we provide counsel and service to every client we work with.
If you’d like to discuss your financial situation with us to see if our fiduciary approach would add value to your situation, click the button below to set up a call or a meeting.