If you have been following any aspect of the financial world the past few years, you have no doubt heard the word “fiduciary” quite a bit. Congress has been debating it, and the news continues to print articles about its meaning. Regulatory agencies like FINRA and the SEC have used the word in a variety of contexts. Though the average reader or advisor may have heard the word, they probably have little or no idea of what it really means. I will not get into a discussion on the full legal definition because if, at some point in the future, Congress, the SEC, or FINRA decides to revise their definitions, then this article would become obsolete.
The word “transparency” is one that should always be used when advisors are meeting with new clients. It helps define what it means to be a fiduciary to clients, and what clients should expect at all times.Getty Images
I would instead prefer to focus on the mindset of a licensed Investment Advisor Representative, like myself, who operates under the federal guidelines as a fiduciary for all their clients. For me, it simply means always putting my clients’ interests first and foremost or, to look at the other side of the coin, always putting MY interests dead last. This may sound obvious and appear to be something that all advisors, whether fiduciary advisors or not, already do. On the contrary, it is a bit more complicated than it seems.
Let’s consider a hypothetical example: A life insurance agent has a potential client who is interested in purchasing a term policy for $1 million. The agent represents five different A+ rated insurance companies. The agent gets price quotes from each of the five companies and is ready to present the results to the client. Since term insurance can often be viewed as a commodity type of product, the choice will frequently come down to which company is offering the lowest premiums. For this example, suppose all five companies offer the exact same monthly premium cost. Keeping the client’s best interest in mind, here’s the question: If two companies pay the advisor a higher commission than the other three, should the advisor have to show all five quotes to the client, or just show the quotes from the two companies that pay the highest commission? As I stated, all five companies are A+ rated, and the products are virtually identical except for commission payout. Now, let’s say the advisor decides to show all five quotes. If the client asks the fiduciary advisor for help in choosing a company, how should they reply?
Let’s try another example: This case would be for an Investment Advisor Representative not licensed for insurance products, but who is considered to serve clients as a fiduciary. Say the client in question is retired, seeking only conservative investments with little or no risk for their very modest IRA account, which represents almost 90% of their investable assets. The client is also in need of lifetime income and concerned that they will run out of money at some point in the future. Based on these parameters, the advisor creates several investment scenarios and fund options that their firm offers. The possibilities include low-fee exchange-traded funds, some mutual funds, REITs, commodities, government bonds, and similar choices in a variety of combinations.
One can argue that the advisor is putting the interest of the client first in this example since the bonds will help with income, and the other investments, though dependent on the returns, will provide the client with a diversified portfolio. But, has the advisor really been acting as a fiduciary for this client? One can also argue that a true fiduciary would have suggested that the client sit down with another representative who is licensed to offer fixed index annuities since the client is not only risk-averse but also quite concerned about running out of money. Based on the client’s needs, they should avoid relying on the stock market, real estate, or commodities for portfolio growth, or portfolio stability, for that matter.
As a fiduciary myself, I have always maintained that it is never about me but always about the client. For some prospective clients that I have met over the years, I have taken the approach that I may not even be the right advisor for them, if I felt that I couldn’t provide them with the most appropriate products or solutions for their needs.
The word “transparency” is one that should always be used when advisors are meeting with new clients. It helps define what it means to be a fiduciary to clients, and what clients should expect at all times. It is important to me, as well as all other fiduciary advisors, that clients always come first, and there is no second!
This content was brought to you by Impact PartnersVoice. Mark Goldfinger is an Investment Advisor Representative with Stonehenge Retirement Planners, LLC, a Registered Investment Advisor. Insurance and annuities offered through Mark Goldfinger, CA Insurance License #0D00057. DT005829-1119
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