This blog is thanks to an alert reader who asked me the question about why all financial planners are not required to be fiduciaries. I’m ALWAYS looking for blog topics, so please e-mail me your questions!
First, what is a fiduciary?
In financial services, being a fiduciary means that your advice ALWAYS benefits the client first and foremost, not the advisor.
Example of a non-fiduciary relationship: A “financial advisor” who only gets paid through commissions generated from selling whole life insurance. That advisor’s advice will 99% of the time involve selling expensive life insurance policies. Even to a young, single woman with no dependents who has credit card debt, no emergency fund, no IRA, and may not be able to afford the premiums.
To be clear, not all life insurance salespeople do that, but some do. That advice is not geared to benefit the client (who doesn’t need the product), it is geared to benefiting the advisor (who will get paid a commission).
So, back to the Fiduciary Rule. There has been an ongoing battle between certain industry advocates (the Certified Financial Planner Board, the Financial Planning Association to name a couple) to require that all financial advisors act as fiduciaries. As yet, that standard is not required.
Why the fight? Well, for financial companies who rely on commissioned sales reps to distribute their products, the fiduciary rule is a nightmare. If the product they are selling is not good for everyone, the fiduciary rule shrinks the pool of potential buyers.
For those in the industry who want financial advisors to have the same trustworthiness of, say attorneys and CPAs, the fiduciary rule is necessary to weed out bad actors and create and create positive perception of the profession.
Alas, the industry lobbyists representing interests of the non-fiduciary advisors are winning the day. Hopefully, for the sake of all buyers of investment products and advice, the fiduciary rule will someday be the legally enforced standard.
P.S., I act as a fiduciary for my clients. All Certified Financial Planner ™ designees are required to adhere to the fiduciary standard.