The following post was originally published on Wealthminder
Meet Hank, Your Local Butcher
It’s five o’clock and your stomach is growling. On your way home from the office, you swing by your local butcher shop to pick up some fresh steak for dinner. Hank, the butcher, sells you skirt steak and you leave happy, knowing that a delicious meal is on the horizon.
Hank didn’t ask your cholesterol level before swiping your credit card. He wasn’t required to take inventory of your fridge and incorporate the ingredients you already owned into your steak selection. And he certainly had little desire to inform you that the salmon from the fishmonger across the street would be better for your health.
Should Hank have deterred you from buying the fattening steak? Was he in the wrong? It’s clear to us that the answer is no. The butcher’s job is to fulfill a transaction. Hank did just that by selling you the skirt steak.
Issues crop up, however, when you enter a butcher shop expecting to find a registered dietitian behind the counter. A butcher is no dietitian.
The Dietitians of the Financial Advisory World
Financial professionals are required to adhere to a standard of “due care” for their clients. There are two versions of due care, though, and they are very different. Brokers (and their representatives) face a suitability standard, which basically means they must only sell your products “suitable” — although not necessarily optimal — for your situation. Unfortunately, the suitability standard has failed to keep pace with developments in investment theory, and it’s possible to satisfy it with products that no informed consumer would consider truly appropriate. Worse, consideration for fees, taxes, and risk tolerance are rarely a focus, if they are discussed at all.
The other standard of care, the fiduciary standard, legally binds financial advisors to serve their clients’ interests above all else. Faced with two identical products, a financial advisor under the fiduciary standard would be obligated to recommend the one with the lowest fee, even if it meant lower income for the advisor. Fiduciaries are financial dietitians; they look out for your financial health.
We grasp intuitively that advice given by a doctor differs from “advice” proffered by a clothing store salesperson. The titles financial advisors give themselves, however, make it tough to determine which flavor of advice they offer. Take, for example, the term “advisor” itself, which is designed to have you feel you are entering into a warm, trusted advisory relationship. Translate this nomenclature to other industries and you might find yourself talking to a “used-car counselor” or “prom dress consultant.”
Let’s clear one thing up: Your broker is not your advisor. Brokers, or broker representatives, get paid when they sell products. This commission-based incentive structure can easily lead to conflicts of interest. Not that all product salespeople are evil — they aren’t doing anything illegal, and many are knowledgeable professionals with a clear moral compass. But we’d rather not allow the ethical code of one individual — whether his business card reads stockbroker, insurance consultant, investment counselor, or wealth manager — to dictate how our retirement funds are invested.
Most people are not conversant in financial instruments, but make sure you understand the kind of financial professional with whom you are working. If you are looking for a new financial advisor, stick with fiduciaries, such as those you can speak with on our advisor marketplace.
If you already work with a financial professional, ask how he is compensated and if he is acting under the fiduciary standard. Are you paying a true advisor or are you doing business with a salesperson? Do you want a comprehensive dietetic assessment or just someone to take your order and give you a slab of meat?