Feb 27, 2020
This week, I’m talking about the fiduciary standard in the world of financial advice. What is a fiduciary and why should you care?
Today, I’m diving a little deeper into the differences between fiduciary and non-fiduciary status by discussing a very important distinction - suitability vs. fiduciary standards. Now if you remember from earlier this week, a fiduciary duty is the ethical and legal obligation to act solely in someone else's best interest. A fiduciary advisor must put the interests of their clients ahead of their own.
Suitability on the other hand, requires that your advisor make recommendations that are suitable based on your situation, assets, risk tolerance, etc., but the standard does not require the advice to be in your best interest. Kind of hard to believe, right?
Maybe a term life insurance policy is what would be in your best interest, but the commissions on term-life policies for advisors that sell them are terrible. Even on a large policy, they’re dismal. But an insurance agent or your financial advisor can make a boatload of a commission by selling you a whole life policy instead. Now, it may or may not be in your best interest to buy that whole life policy, but that actually doesn’t matter. As long as the recommendation is suitable it doesn’t actually have to be in your best interest. The agent has done nothing wrong by selling you a policy that was more ideal for them than for you.
Just like if you go to a car dealership. If you’re at the Toyota dealership and you tell the salesperson what you need in a car, the perfect car for you might be a Honda or a Ford. But is the Toyota salesperson going to tell you to walk away and go down the street somewhere else - no! But you know that. And because you know that, you can make a more informed decision about taking their advice.
The same is true when working with a financial advisor. While a fiduciary standard is ideal, we live in a world today where most advisors are just required to find a suitable fit for you, and not something that’s necessarily in your best interest.
So the best thing you can do is to understand whether or not your advisor is a fiduciary and understand how they get paid. When you understand that, you can trust the advice you’re getting or go find an advisor that you do trust.
That’s it for today. Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip.
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