Imagine you went to the local grocery store to buy a green apple. Your grocer has two identical green apples to purchase, but one apple is $1 more than the other. Under the fiduciary standard, the grocer would be obligated to sell you the cheaper apple—it is in your best interest to buy the cheaper apple given their identical nature. Under the suitability standard, the grocer could sell you the more expensive apple—despite its higher cost, it still satisfies your need of purchasing a green apple.
Now you may be wondering: Who cares about green apples and what does the fiduciary standard and suitability standard have to do with me?
To speak to these questions, we recently attended a luncheon on the impact of the Department of Labor’s (DOL) fiduciary conflict of interest rule on wealth management. For those less familiar with this rule, the DOL mandated “all who provide retirement investment advice to plans, plan fiduciaries and IRAs to abide by a “fiduciary” standard—putting their clients’ best interest before their own profits.” In contrast, financial advisors that adhere to the suitability standard must only make recommendations that are suitable for a client, but need not be in their best interest.
Compliance with the DOL’s fiduciary rule does not take effect until April 10, 2017, but it has already garnered substantial media attention due to the wide ranging impact it is expected to have on the financial industry.
The discussion at the luncheon reminds us of a segment from John Oliver’s show, “Last Week Tonight,” by which he analyzes the significance of the DOL’s fiduciary rule. It is an entertaining twenty-minute clip worth viewing.
In any case, we will summarize John’s three pertinent points as follows:
- It is currently legal for financial advisors to put their own interests ahead of yours, unless they are a fiduciary
- Be mindful of fees – the compounding nature of fees can have a detrimental effect on one’s long term investment performance
- Be aware of the challenges that face active management; incorporate low cost, passive investment strategies
In light of these three points John Oliver makes, an investor should strongly consider asking their financial advisor the following three questions:
- Do you act as a fiduciary?
- What are your fees and how are you compensated?
- How do you select active and passive investment strategies?
Unfortunately for investors, the financial world and many of the complex products and services available for purchase are not as straightforward as say, “buying an apple at your local grocery store.” As a result, we believe education is a critical component in making an investment recommendation. The investor must have a clear understanding of what they are purchasing, the costs associated, and how the advisor is compensated.
At Matrix Wealth Partners, we act as a fiduciary in a transparent, informative and educational manner. In doing so, we believe we are well positioned to put clients’ interests first.