Key Takeaways
Not all individuals calling themselves financial advisors must follow the fiduciary standard. This can lead to conflicts of interest.
A fiduciary must always put their client’s best interests ahead of their own.
If you’re unsure about your advisor, it’s acceptable to inquire about their compensation arrangement and fiduciary status.
You may have heard the term "fiduciary" used in the news lately. The U.S. Department of Labor (DOL) recently announced a new rule mandating that all financial advisors must put their client's best interests first when making recommendations regarding their retirement plan rollovers to an IRA or annuity.
Isn’t My Advisor Always Putting My Best Interests First?
Unfortunately, no. That's why I wanted to bring this new ruling to your attention. Many individuals now call themselves "financial advisors" but do not adhere to the fiduciary standard. Not all advisors are legally or ethically required to prioritize their client's best interests; they only need to make recommendations that are either "reasonable" or "suitable." How would you feel if your doctor took that approach to your care?
This new DOL ruling is aimed at the types of advisors who use a retirement plan rollover as an opportunity to sell an annuity or life insurance product (or some commission-driven product) and then move on to the next sale. The new ruling has little impact on us here at Novi because we are already acting as fiduciaries for our clients (see below). If you or someone you know is working with a non-fiduciary advisor, it's crucial to recognize this distinction.
It might be surprising that so many financial “professionals” - and their employers - oppose the new ruling, who also have a powerful lobbying arm intent on preserving how their constituents are compensated.
Again, advisors who adhere to a fiduciary standard as we do here at Novi must ALWAYS act
in the client’s best interest. We can't make recommendations until we have thoroughly researched the product or service and conducted an in-depth analysis of our client's unique situation. If there are any conflicts of interest about recommending a product or service, we must disclose them upfront. Once we make the final recommendations, we must implement them as efficiently and cost-effectively as possible. The term “cost-effective” is an important distinction.
The fiduciary standard we must follow differs from the less stringent “suitability standard” which only requires the advisor's guidance to be suitable or reasonable. That means their recommendations don’t necessarily need to align with the client’s goals or risk profile. They don’t need to be transparent about their reason for making the recommendation or disclose conflicts of interest they may have. Bottom line: The suitability standard allows “advisors” to recommend products that earn them higher commissions, even if there’s a better option available. Get the picture?
While investment professionals can use a variety of titles – financial consultant, financial planner, wealth manager, financial advisor – the title does not provide much clarity on the level of care they’re required to give their clients.
How Do I Know If My Advisor Is A Fiduciary?
If you don’t know if your advisor is a fiduciary, ask. Advisors who operate under a fiduciary standard are proud to do so and will make it clear as soon as you consider collaborating with them.
If you’re a Novi client, you know that every advisor on our team is a fiduciary and Certified Financial Planner (CFP®). If your advisor holds a CFP® (Certified Financial Planner) designation, he or she must abide by a fiduciary standard established by the CFP® Board of Standards. Fiduciaries typically operate under a fee-only compensation structure, which means the compensation they receive is from their clients.
At Novi, we also belong to the National Association of Personal Financial Advisors (NAPFA) which requires all members to adhere strictly to the fiduciary standard. Further, our firm is a Registered Investment Advisor (RIA). RIAs must be registered with the SEC (or with their state regulators), and are held to a fiduciary standard per the Investment Advisors Act of 1940. By contrast; agents, stockbrokers, and registered representatives are regulated under the Securities Exchange Act of 1934, which only requires them to follow the suitability standard.
Conclusion
If you or someone close to you has questions about how your advisor is paid or the level of suitability they must follow, please don’t hesitate to reach out. We are happy to help.
RYAN M. VOGEL, CFP® is the CHIEF PLANNING OFFICER, PARTNER at Novi Wealth
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