Fiduciary: Not Just Financial Jargon

MON, MAY 14th, 2018
 
Reactions to headlines like Wells Fargo to Pay $1 Billion to Settle Lending-Abuse Claims barely register on the Richter scale. For decades firms in the financial services industry have agreed to pay large settlements to federal regulators and then simply continue with business as usual.
 
A recent article in The Economist entitled Regulatory Settlements Raise Questions about America’s Financial Markets focused on the multi-billion dollar settlements paid by Credit Suisse and Deutsche Bank among others to direct attention to how Wall Street is rife with conflicts of interest. The Economist expressed deep concern with how settlements end up sweeping bad behavior under the rug. Misalignment of interests continues to cost consumers billions of dollars and clients rarely have any idea that their financial firm generates profits by defrauding them.
 

DOL Fiduciary Rule

The Department of Labor attempted to fix this poor alignment of interest by requiring a fiduciary standard for all those who either advise or invest retirement plans. The aforementioned DOL rule has been delayed several times and, sadly for clients, may be postponed indefinitely.
 

Suitability vs. Fiduciary Standards

Currently there are two standards for providing investment assistance and financial advice. The first is the suitability standard which states that the agent must recommend investments that are suitable for the individual client. The second is the fiduciary standard which states that the advisor must always act in the client’s best interest. Further complicating the issue are financial agents that have dual registration. They must act as a fiduciary while wearing their Registered Investment Advisor hat but operate under the suitability standard when wearing their Registered Representative / Insurance Agent hat.
 

What’s the Difference?

Imagine a mutual fund that has two share classes meaning there are two different ways to own the investment product. The first class has the investor paying 5.0% commission plus 0.75% per year in ongoing sales charges and 1.0% ongoing investment management fee. The second class of shares eliminates sales charges and has only a 1.0% investment management fee. Both share classes are suitable in respect that the underlying portfolio is the same. But, only the second share class without sales charges is best for the client and meets the fiduciary standard.
 

Advertising with Testimonials

Further muddying the waters are the dramatic differences in how the two camps can advertise. The suitability standard players can say most anything. Have you seen heartwarming television ads where a good-looking financial advisor helps a traditional nuclear family successfully launch their children and retire to a luxury beach house? Beautiful imagery. Total fiction. The suitability regulations allow use of these fake testimonial ads. Rules for fiduciaries do not allow use of real testimonials, never mind the bogus stories crafted by Wall Street marketing firms!
 

As Investors, What Can You Do?

First, accept that the regulatory environment is not looking out for you; you have to look out for yourself. Second, understand that firms operating under the suitability standard ultimately work for the companies whose investment and insurance products they sell; they do not work for you. Seek out an advisor who is a CERTIFIED FINANCIAL PLANNER™ working at a fee-only firm who wears their fiduciary hat all the time.
 

Albion Financial Group: Always a Fiduciary

Countless times we’ve helped clients understand the investment and insurance products they’ve been sold by big name financial institutions, pointing out associated risks, benefits and costs. Very rarely in our thirty-five year history has a client truly understood what they purchased. And, not once has a client expressed delight upon gaining a full understanding what they actually own.
 
As fiduciaries, our team of Senior Wealth Advisors can help you evaluate the various structures of your insurance policies as well as analyze your mutual fund positions to ensure both suitability and cost efficiency. Visit us for a complimentary advising session to learn more about the products you own inside your own investment portfolios.
 
John Q. Bird, CFA, CFP®, MBA
President, Principal and Co-Founder
Albion Financial Group
jbird@albionfinancial.com
(801) 487-3700

About Albion Financial

Established in 1982, Albion Financial Group is an independent, fee-only financial planner and investment manager located in Salt Lake City, Utah.