New Financial Advisor Regs
What do the people who work in car dealership showrooms, the Avon lady, and financial advisors have in common? They’re all, first and foremost, salespeople.
And what do the most effective, highest earning salespeople appear to do: Make recommendations based on your needs and desires, as discovered through questioning you.
But here’s what these same salespeople actually do: Make recommendations that arguably (by their well practiced shtick) best suit your needs and desires but that, first and foremost, maximize the compensation the salesperson can earn through your choices.
You probably agree with my assessment for car salespeople and maybe the Avon lady. But financial advisors? Naaah, how could that be? We trust these “professionals” with our retirement security!
Time to wake up and smell the coffee, friend.
New Regulation Coming for Financial Advisors
Effective April 2017, financial advisors and other professionals who offer investment advice will legally be required—for the first time—to provide advice that is best for the investor’s situation, not necessarily best for the funds that provide compensation to the advisor.
It’s called exercising a “fiduciary level of care,” which means the advisor must act in the client’s best interest.
“Say what? You mean my advisor for the last 10 years may not have been giving me advice that’s in my best interest?”
That is correct. And—forgive me for saying so—anyone shocked by the implications of the new, fiduciary care regulation is dangerously naïve about the financial. The danger is to one’s retirement security.
No Surprise Here
You understand capitalism’s core engine, right? It’s the profit motive. In a capitalist economy, businesses’ and individuals’ goal, first and foremost, is to make as much cash as possible. I don’t have a problem with that—capitalism can work wonders (and it can also wreak havoc—climate change, to offer one example).
But what I’m trying to emphasize here is that the entire financial industry—including financial advisors—is no exception.
Don’t fall for the shtick.
Sure, it’s possible that the investments that are best for your income are also best for your advisor’s income. But understand that would be just a happy—and rare—coincidence.
I appreciate that our own best interests motivate us. I’m no exception! But what’s often missing in the financial and many other industries is transparency.
Imagine for a moment that your financial advisor gives you, along with a list of investments she recommends, an accounting of the compensation she earns when you invest in each fund. Would that cause you to question her motives and the plans she recommends? Of course it would! And that’s exactly why you’re not offered that compensation accounting.
Caveat Emptor Applies to Wall Street—Especially to Wall Street
I don’t mean to disrespect financial advisors or discourage you from hiring one. I do though urge you to ask for and get a full accounting of how advisors you’re interviewing are compensated. A generic answer like “you don’t pay me, the funds I represent pay me” might be technically accurate, but you need to understand and appreciate how such a compensation system can skew an advisor’s recommendations.
You work, right? If you knew you’d get paid more if you did task A than if you did task B, which task would you always opt for?
This is human nature. If your advisor is human, watch out!