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Why the Fiduciary Standard Is Important

President Harry Truman once said, “If you can’t convince them, confuse them.” In the financial planning world this statement has truth. Financial products are becoming more and more complex at the expense of everyday investors. Unfortunately, this complexity produces fees and conflicts of interests that are not disclosed to the client, and this is problematic to the planning process. Fees and an advisor’s potential conflicts of interests need to be fully disclosed to the client so he or she can determine if the product is truly in their best interest. The client’s best interest should always come first—this is why the fiduciary standard is important.

In Tony Robbin’s book, Money: Master The Game, he explains the fiduciary standard in greater detail. The majority of financial professionals are brokers that are affiliated with a broker-dealer. Their working obligation is first to their parent company to produce a profit, thus allowing the client to suffer within the financial planning process. (For related reading, see: How Much Is a Financial Planner Worth?)

Financial professionals who are affiliated with a broker-dealer are governed by the suitability standard and need to only recommend products that are suitable for the client instead of having to place the client’s best interest above their own. Commission-based products drive this suitability standard and no client deserves a financial product that is just suitable for their situation.

Working with a financial professional that is on your side legally is the best course of action for your financial plan. An independent registered investment advisor (RIA) is legally required to place the client’s needs ahead of their own. This legal requirement is called the fiduciary standard

However, there are loopholes to the fiduciary standard. If an advisor is working for a registered investment advisory firm but is still affiliated with a broker-dealer, then he or she is a fiduciary but is also a broker. In other words, they are dually registered. This type of advisor wears two hats.  At times they are fiduciaries and at times they are brokers, so the client does not always know when they are working in their best interest.

This process can be very confusing. (For related reading, see: Why Financial Advisors Need to Earn the CFP Mark.)

How Can Investors Protect Themselves? 

Investors can protect themselves by working with an RIA that is not affiliated with a broker-dealer.  An independent RIA is legally required to always do what is in the client’s interest and uphold the fiduciary standard. This type of advisor is required to practice fee transparency and disclose any potential conflict of interests.

Working with this type of advisor allows the client to determine if the benefits outweigh the costs and see the true value of the financial planning advice the advisor provides. In addition, the client will know he or she is working with a financial professional that places the client’s interest above their own. (For related reading, see: Top Tip for Financial Success: 'Start Planning Early.')