We learned everything we needed to know in kindergarten, right? Play fair, share, say please, thank you and sorry. fiduciary-duty-of-investment-advisors

What else is there that we, as consenting adult investors, need to ensure a happy and productive investing lifetime as the rules of kindergarten promise our 5 and 6 year olds?

Well, I could certainly equate quite a few of the many rules of kindergarten to adult life in general – but here’s my stab at how the basic rules of life, essentially, apply to that of the fiduciary duty of investment advisors:

1. Play Fair

It’s not fair to sell someone something that’s better for you and not them.

Fiduciary advisors are legally bound to play fair, and to do what’s in the best interest of the client.  Non-fiduciary advisors are asked to simply be “suitable” with their product sales.

2. Don’t Take Things That Aren’t Yours

Charging investors excessive fees and/or commissions for products they don’t need is no different than stealing. In fact, excessive fees and commission can easily rob investors of 21% of their retirement nest egg.

Fiduciaries are bound to low-cost options – and again – putting the best interest of the client (not their paycheck) FIRST. Non-fiduciary advisors over-charge often and early…simply because they can.

3. Share Everything

If you’re going to give someone control over your investments, shouldn’t they share everything with you?  All fees, costs, hidden agendas, risks etc.?

A Fiduciary advisor has nothing to hide.  With a duty to ‘no conflicts of interest between the advisor and the client’, what would they have to hide?

Demand the answers to all the questions that a kindergartener would ask your would-be or current advisor…

  • How much does this cost?
  • Why do I want this?
  • Why should I use you?
  • Have you been in trouble before?

If you’re looking for a few cold-hard facts about the Fiduciary standard…facts that help you understanding why you’d want to demand a licensed, Registered Investment Advisor versus someone holding themselves out as a Financial Advisor, it comes down to one simply standard: suitability versus fiduciary.

Here’s what you need to know for the fiduciary “playground”:

Standard of Suitability:

This refers to the general appropriateness of an advisor’s recommendations – mostly regarding the “time horizon” (when a client will need to use the money) and “risk profile” (how much risk the client wants to take to earn a certain return).

An advisor, subject only to the Standard of Suitability, is held to a standard created by FINRA (The Financial Industry Regulatory Authority) that states the investment advice offered should be “suitable”.

We uphold that you should seek more than just suitability.

A key distinction with the Suitability Standard is that the advisor’s loyalties are not REQUIRED to be with the client – and unfortunately, are often more in favor of the broker dealer for whom the advisor works and the advisor themselves, in the form of, yes, conflicts of interest that ultimately cost you money.

Fiduciary Standard:

As part of the Investment Advisors Act of 1940, the fiduciary standard states that the advisor is held to a higher standard of care than that of the Standard of Suitability.

A fiduciary arrangement with the client means that the advisor always holds the client’s best interests above his or her own.  In simple terms, NO CONFLICTS OF INTEREST.

You’ll know you’re working with an advisor in a Fiduciary capacity by (1) asking them if they’re a Registered Investment Advisor and (2) f you sign a contract with them, engaging with them in a fiduciary capacity.

BOTH of these must be met to be covered under the Fiduciary Standard.

Confusing stuff, right? Remember the saying, “Out of the mouths of babes?” Well, most investors acknowledge that they’re toddlers when it comes investing, so start acting like one!

Simply ask the questions the toddler isn’t afraid to ask and above all, demand all that you ever learned in kindergarten:  to be kind, fair, share and above all, don’t take things that aren’t yours!