One Question No One Ever Asks Their Financial Advisor

Whenever I speak with someone about hiring us as their financial advisor, we get questions like “How’s your investment performance been?”, “Can you save me any money on my taxes?”, “What are your typical clients look like?”There’s one question no one has ever asked me and they really should. “Will you sign a fiduciary pledge?”

A fiduciary what?! What on earth is a fiduciary pledge? Well, a fiduciary is someone who has to put your interests ahead of their own. Seems logical, don’t you think? You might even think that financial advisors, stock brokers and insurance agents all be required by law to put the interest of our clients ahead of our own. Unfortunately, there is no such law. Brokerage companies, like Merrill Lynch, Morgan Stanley, UBS, Ameriprise, Wells Fargo, Edward Jones, banks, and insurance companies, all have to operate under a lower standard called a “suitability standard.” Well, that sounds unreasonable don’t you think? Their claim is that they make recommendations that are suitable for you. Just because an investment or a recommendation is suitable, that doesn’t mean it’s the best choice for you.

Let me give you a couple of examples – Let’s suppose you need or want to purchase a growth stock mutual fund. You go to your financial advisor and he has two options that he could offer you. One fund pays 5% commission and possibly a fancy trip to Hawaii. The other pays 2% commission and no chance for the trip. Based on that fee structure, financial advisors may be more inclined to push the one that pays the highest commission without thinking if it’s the best for you.  They will probably forget to tell you how much they are making from that “recommendation.” Another example is the insurance agent that recommends that you buy an expensive whole life insurance policy instead of a lower cost term life insurance policy. Which one pays more? Well, those are just a couple of examples of advisors meeting the suitability standard, but not a fiduciary standard. A fiduciary would have been required to recommend that lower cost mutual fund and the lower cost life insurance alternative.

Oh, and by the way, for all of you Dave Ramsey or Clark Howard fans, here’s something you may not know: Dave Ramsey has endorsed local advisors who adhere to the lower suitability standard. Clark Howard suggests you use advisors who use the fiduciary standard.

So, what should you do? I would recommend that any financial advisor that you are thinking about working with or if you are already using a financial advisor, just ask them to sign the fiduciary pledge. And if you need a copy of a fiduciary pledge, just send us a message and we will send one to you.