The term fiduciary is one we can’t stress enough! It’s very important to you, the investor. Currently, financial advisors are regulated under two standards:
- The Suitability Standard – Is the investment merely appropriate for the client’s personal situation? This typically applies to advisors working for a brokerage firm or insurance company. Governed by FINRA – Financial Industry Regulatory Authority)
- The Fiduciary Standard – Is the investment in client’s best interests? This standard applies to Registered Investment Advisors (RIA’s). Fiduciaries are legally obligated to act in client’s best interests. Under purview of the Investment Advisors Act of 1940
CPS Director of Retirement Plan Services, Nolen Bailey, CFP®, says “Put simply, if a fiduciary is giving financial advice, they must put the best interests of their clients above their own financial interests.”
A fiduciary must remove any potential conflicts of interest when giving financial advice. Bailey gives this example, “If a non-fiduciary advisor is choosing between two mutual funds to recommend to a client. Let’s say one of those funds would pay the advisor a 0.5% commission, and the other would pay a 5% commission. While the fund with the smaller commission may be the better option for the client, if the higher-commission fund could be defended as being “suitable”, the inherent conflict of interest in that decision begins to rear its head.”
When variable compensation comes into play, clients risk getting advice that benefits the advisor more than it benefits the client. Variable compensation can be called many things.
Bailey says, “I often see 12b-1 fees, Sub-TA fees, Deferred Sales Charges, Front-End and Back-End Loads and even Transaction Fees. They essentially all do one thing: Pay a salesperson for selling a mutual fund.”
Since the recent introduction of the Department of Labor’s Fiduciary Rule, some advisors have begun to state that their services are “fee-based”. It is important to understand the difference between fee-based and fee-only: A fee-based advisor may be charging an asset-based fee in addition to the additional fees and commissions that can be hidden inside of the mutual funds. A fee-only advisor is only paid a fee by their clients for their services and receives no other compensation.
Bailey says, “Americans who are saving for retirement, and/or living off of their retirement savings, face many challenges. Getting investment advice that puts the client’s wealth first, above that of their advisor, should not be added to that list.” Figuring out whether an advisor’s advice is really in your best interest doesn’t need to be one of those challenges. CPS Investment Advisors strongly encourages everyone to understand how their advisor is compensated and to choose a true fiduciary.