Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
In failing to hold all those who provide financial advice to a comprehensive fiduciary standard, the SEC enacted Reg BI to enforce a “best interest” standard. Do your clients understand what that means and its implications?
Though the pandemic initially distracted many and the unkind markets of 2022 grabbed the attention of everyone else, there are still discontented rumblings about the ramifications of the demise of the fiduciary standard for advisors working with retirement accounts. That demise was put forward by the Department of Labor and subsequently struck down by the Fifth Circuit in 2018. Perhaps as a gesture toward replacement, the SEC gave us Reg BI, which is theoretically aimed at affording investors better protections, more transparency, and a “best interest” standard for broker-dealer recommendations.
Depending on whom you ask, Reg BI is either a qualified step in the right direction or a confusing double standard. Though it requires broker-dealers to provide recommendations “in the best interest” of investors at the time of the recommendation, many observers point out that this is not the same as a fiduciary standard of care that extends for the life of the client-advisor relationship, which likely runs well beyond the time of the recommendation. In its comparison of the CFP Board’s Code and Standards with Reg BI, the Board noted numerous instances where the Code and Standards establish a higher bar in client care than the SEC’s Reg BI.
But most of us already know this, right? The more important question – and far more crucial to the well-being of our practices – is how well our clients understand the implications of the fiduciary standard (or its absence) for their financial planning and investment management. It’s easy to get distracted by the day-to-day busyness of answering calls, meeting with clients, replying to emails, and keeping up with the markets, to the point that we forget the importance of highlighting for our clients our central value proposition: the fiduciary care with which we conduct our relationships. If we aren’t focusing our clients’ attention on that, in both overt and subtle ways, we’re neglecting one of the most important cards in our hand and, at the same time, undercutting our perceived value to those we are trying to serve.
Several avenues are open to us to make the case for the value of fiduciary care. Our websites should include links to whitepapers and other reliable sources of information about what it means to be a fiduciary and why that matters to our clients’ financial health. The CFP Board offers resources and information designed to help us get the message out to our clients and others. Our blogs, our newsletters, and our public presentations in the media and elsewhere should include periodic reminders about the fiduciary standard and how we apply it in our everyday interactions.
Remember the dollars-and-cents advantages of qualified, professional advice as it impacts our clients’ portfolio outcomes. Estimates of the direct cost to consumers of bad or inappropriate financial advice are in the tens of billions of dollars annually, typically because the recommendations have more to do with making a sale than with matching the investor’s goals, risk tolerance, or life stage. A reduction in portfolio performance of as little as 1% per year because of unnecessarily high fees or poor returns can reduce the amount of money available in a retirement account by as much as 25% over a 35-year period. As fiduciaries, our duty to thoroughly understand our clients’ situations offers us an important antidote to this type of slipshod practice. We need to be telling this to our clients, our prospects, and anyone else in range of our communications.
Finally, we need to be training our clients and especially our prospects to ask the right questions of anyone whom they are considering as an investment advisor:
- How do you get paid?
- How do you decide what investments to recommend?
- How will you become familiar with my situation and needs?
- How often can I expect to meet with you about my account?
- What is your practice for returning calls or responding to emails?
- What if I have questions later?
- Will you give me a list of costs and fees before making an investment?
- What are your qualifications?
- What is your investment philosophy?
- How will you allocate my assets?
- Can you help me minimize the effect of taxes on my investments?
Teach them to insist on answers free of insider jargon, delivered in terms that they understand. We need to hold ourselves to the highest standards in answering such questions forthrightly, candidly, and transparently.
It has often been said that most of us “don’t know what we don’t know.” As fiduciary, professional financial advisors, we need to strive to ensure that this is not true of our clients. They need to know how important it is that we place their best interests foremost; they need to understand the practical ways this affects their finances; and most of all, they need to see us putting this principle into practice in every interaction they have with us. Ultimately, this is our differentiator, our “hedgehog strategy.” Providing fiduciary care for our clients is how we set ourselves apart and gain the professional respect we need to continue to thrive.
And most importantly, it’s also the right thing to do.
- FINRA.org, “Reg BI Overview.”
- Mark Schoeff Jr., “SEC Emphasizes ‘Best Interest’ Aspect of Reg BI…”, September 8, 2022.
- CFP Board, “Comparing CFP Board’s Code of Ethics and Standards of Conduct to the SEC’s Regulation Best Interest.”
- Kat Tretina, “How Fiduciary Duty Impacts Financial Advisors.” Forbes.com, July 15, 2022.
- CFP Board, “Increasing Awareness.”
- Liz Weston, “Here’s What Bad Financial Advice Costs You.” Nerdwallet.com, January 9, 2020.
Kimberly Foss, CFP®, CPWA®, CFT-I™ candidate, is president and founder of Empyrion Wealth Management, an RIA with offices in Roseville, CA, and New York City. Her book, Wealthy By Design, is a New York Times bestseller. She has been a commentator for NBC, ABC, Fox News and The Wall Street Journal. You can reach her at [email protected]