The fiduciary standard requires an advisor to put the client’s interests ahead of his/her own. This means not only giving the client the proper advice but implementing that advice in the best interest of the client.

Brokers, bank reps and insurance agents who sell investments do not follow a fiduciary standard. They are only bound by a suitability standard, which is a lower standard of care. It requires merely that they recommend investments that are “suitable” for the client’s circumstances. If there are different ways of implementing the recommendation, this standard allows a broker to sell the one that is most profitable to the broker. Here’s an example of the difference:

Suitability
Let’s say an older client tells a bank rep or broker and that he wants to be conservative with his investments. The broker would likely recommend a portfolio that favors bonds and income producing investments, typically considered conservative. So far, so good. But he is then allowed to sell that client mutual funds that pay out the highest commissions to the broker or to sell proprietary funds that are sponsored by the brokerage firm. He is even allowed to package these funds inside a long term annuity contract which not only has high fees but has surrender charges for breaking the contract. The broker’s loyalty is to his employer, not to the client. ** The client gets a “suitable” portfolio and goes away thinking he has a financial plan. Even worse, he believes the broker had his best interests in mind when actually the “plan” was a tool used to sell and annuity or heavy loaded mutual funds.

Fiduciary
Let’s say, instead, that the client goes to Main Street Financial. First, we discuss what it means to be conservative and how that relates to the client’s personal plans and goals (i.e. is it too conservative to achieve what he wants? Or is it not conservative enough to protect what he has?). Then we design the portfolio with the goal of producing the best results at the lowest fees. We do not sell investments so there is no conflict of interest in implementing the advice. We then monitor the portfolio to make sure things are going as planned and make changes as dictated by the market and the client’s personal life. The client develops a relationship with an advisor who looks out for him.

To find out more about how this approach would benefit you, call us at (914) 698-8303 to arrange for a free consultation.

** We have all seen the ads that show how the broker appears to have the client’s best interest in mind but, in one arbitration case after another, you find that when faced with a lawsuit, the broker’s defense is that the account agreement never mentioned a fiduciary relationship.