Essential Duties in a Fiduciary Pledge
The Duty of Good Faith
Financial advisors with a duty of good faith have a legal, ethical and moral obligation to treat all clients fairly. In other words, financial advisors shouldn't favor one client or group of clients over others, especially as it relates to fees.
So what information should you ask your financial advisor to disclose to determine if you're paying fair fees?
- Is your financial advisor receiving any recruitment compensation or bonuses? Did you know that financial advisors who switch firms are typically paid millions of dollars to bring their clients with them to their new firm? Why this should concern you: Given that the firm that recruited your financial advisor needs to recoup their huge investment in your financial advisor, it's highly unlikely they'll allow your financial advisor to give you the maximum fee discount, if any discount at all. How fair is that when you're one of the reasons your financial advisor got paid a muli-million dollar bonus?
- What is the firm's maximum fee discount? Did you know that your financial advisor can discount your investment management fees as much as 33% from their firms’ standard fee schedule. Why this should concern you: The larger the discount they give you, the less money they and their firm receive from you. Any financial advisor who is acting in good faith will always give you the maximum fee discount allowed.
- What is the fee discount you are receiving? Did you know the DOL's Fiduciary Rule requires that financial advisors charge reasonable fees? Why this should concern you: While "reasonable" is a subjective term, reasonable fees aren't arbitrary. If their firm allows fee discounts, then a fair and "reasonable" fee is one that is discounted the maximum allowed. For example, would you pay the retail price for a refrigerator when everyone knows the store allows the salesperson to discount the price by 33%?
The Duty of Due Care
Financial advisors with a duty of due care have a legal, ethical and moral obligation to exercise the skill of an expert when giving financial and investment advice and making product and service recommendations. In other words, a financial advisor is not an expert if all they have done is passed the Series 6 or 7 test.
So what information should you ask your financial advisor to disclose to determine if they're an expert?
- What external credentials has your financial advisor mastered? Have you noticed all the titles listed after a financial advisor's name? Senior Vice President, Wealth Advisor, Portfolio Manager, Executive Director, Investment Management Consultant, Financial Planning Specialist ....... and the list goes on. Why this should concern you: Because all these titles are issued by their firm—they mean nothing in the real world. By the way, if your financial advisor is a senior vice president, it just means they generate a lot of fees for their firm. The main credentials you should be looking for are the CERTIFIED FINANCIAL PLANNER™ (CFP® ) and the CHARTERED FINANCIAL ANALYST (CFA) designations.
- Does your financial advisor have a college degree? Did you know there are no educational requirements for becoming a financial advisor. Nope, not even a high school education. An advisor just needs to pass the Series 6 or 7 test to become licensed. Why this should concern you: We'll let you answer that one. By the way, just because they list a college or university under the professional details doesn't mean they graduated (i.e., if you don't see the degree earned, then they only attended).
The Duty of Loyalty
Financial advisors with a duty of loyalty have a legal, ethical and moral obligation to always put their clients' best interests first, no matter what. In other words, a loyal financial advisor will always eliminate any conflict of interest (i.e., money) that calls into question the honesty of their service.
So what information should you ask your financial advisor to disclose to determine if they're providing honest service?
- Is your financial advisor presenting the lowest-cost option as one of their recommendations? If not, then you can be sure that what they're recommending pays them more than the lowest-cost option for you. Why this should concern you: Your financial advisor is looking out for their best interest (profits) rather than your best interest (low expenses). Even if they do present the lowest-cost options as one of the solutions, you still need to know how they're compensated for all the solutions.
- Is your financial advisor recommending you pay an asset-based fee for an account that has low activity? With the DOL's Fiduciary Rule, this could be become a common occurrence as advisors avoid charging commissions in retirement accounts. Why this should concern you: You'll likely pay unnecessary and ongoing fees for an account that requires very little time, attention and work.