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Is Your Financial Advisor Really Looking Out for You?

by in Trusted Advice

Selecting a financial advisor is a big decision. You naturally want an advisor who cares as much about your financial welfare as you do. How can you be sure that the advisor you choose will always put your interests first?

One of the most important questions you should ask of your potential advisor is: "Do you always act according to a fiduciary standard?" Beware, many advisors are really brokers who are subject to a "suitability" standard. This means that the broker(aka advisor) must have a reasonable basis for believing that a recommendation is suitable for you. The suitability standard is a much lower standard than being a fiduciary, which demands that the advisor place the client's interests ahead of his or her own.

Here's an example contrasting the two standards of advisor conduct. Suppose an advisor can either sell a high-commission product or recommend a no-commission product, both of which are suitable for you. A fiduciary advisor will be required to recommend the no-commission product. The non-fiduciary advisor could recommend both suitable products; however, you will be worse off if he/she selects the high-commission product because the higher costs that go toward his/her compensation tend to reduce your investment return. 

As you see, it is very important to understand how the advisor is compensated. The client agreement should state clearly the nature of how the advisor gets paid. If compensation is fee only, then the only compensation the advisor should receive is from your advisory fee. If the advisor is paid from commissions, then that must be disclosed as well. 

Please note that there is a gray area: It is possible for an advisor to be both a fiduciary and a broker, meaning that such a dually registered advisor may act as a fiduciary on one transaction and as a broker on another transaction. This is not uncommon as over 80% of investment advisors are registered also as brokers.

Registered Investment Advisor (RIA) firms like Covenant Asset Management are generally regulated by the Investment Advisors Act of 1940 and relevant state statutes which require that investment advisors must act in the best interests of their clients. The Supreme Court has interpreted the Advisors Act as binding investment advisors to a fiduciary duty. Advisors musy clearly know their clients and provide complete disclosure regarding fees and conflicts of interest. 

Since the founding of Covenant Asset Management nearly 17 years ago, our financial advisors have always adhered to the fiduciary standard of conduct by putting our clients' best interests first and foremost in our investment decision-making. We pledge to continue behaving as trustworthy fiduciaries in the future, regardless of any regulatory changes.




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Guest Saturday, 22 February 2020