Fiduciary or Suitability Standard? You Decide!

Did you know that there are different types of financial advisors? Did you know that different advisors have different standards of care when dealing with their clients or customers? Some financial advisors are held to a Fiduciary Standard while others are held to a Suitability Standard of care. Which is better?

Below is an edited response I sent to a friend of mine who works at an annuity company. Her boss sent her an email urging her to write her Congressman about voting down the proposed DOL’s Fiduciary rule change. This is my response to her question about whether or not advisors should be held to a Fiduciary standard per the DOL rule. (Update: the DOL rule was vacated on March 15th, 2018. But the concepts still apply. And you can still find a Fiduciary advisor.)

——begin email response———–

Honestly, I’m on the opposing side of the fence of your bosses. The debate is whether or not financial advisors should put clients’ interest ahead of their own when giving financial advice. Right now there are two standards:

1. The Fiduciary Standard – Advisors have to put the interest of their clients ahead of their own when offering advice. This is like a doctors’ Hippocratic oath and is part of the standard of care for fee-only advisors like myself.
2. The Suitability Standard – Advisors only have to give advice suitable to the client’s risk levels.

How The Advisor is Paid

A key point is a difference between how the advisor is paid under the two standards. Brokers usually make between 2.75% and 15% commission. Fiduciaries usually are paid by a flat fee like $2,000 for a plan, a percentage to manage investments, usually 1%, or an hourly rate. Hourly rates vary from $150/hr to $450/hr. The broker argument is that ordinary people can’t afford $450/hr or $2,000 for a plan, therefore, the DOL isn’t fair. But let’s look a little closer.

An Example

A client of mine was advised to buy an annuity with her 401k when she retired. Her 401k was worth $400,000. The salesperson made 7.5% commission or $30,000 in one transaction. He spent maybe 3hrs with the client. But for the sake of humor, let’s say it was 6hrs. That’s $5,000/hr. Actually, the commission was closer to $32,000, but what’s $2,000 right? Well, $2,000 is what I charged her to create a financial plan. She actually had $2.2 million in assets. So for $2,000, I offered investment advice, tax advice, and retirement advice on ALL her assets, AND an insurance needs analysis and estate plan review. The broker picked the annuity product and the investments inside it… Oh, they also made sure the investments were suitable because that’s the standard of care they were held to.

Anti-DOL Stance

Now on to the broker’s argument being spun by the lobbyist with way deeper pockets than my side of the fence. To put it in perspective, there are about 60,000 fiduciary advisors in the US and about 900,000 broker-dealers and even more insurance companies that all make commissions. They claim that small investors, those with $25,000 in an IRA, won’t be able to afford advice if they have to pay $450/hr or a flat fee like $2,000. And those fee-only advisors that charge 1% to manage investments don’t touch anything less than $100,000 accounts. The truth is that those of us that work hourly or flat fee like myself, charge way less than commissions.

Furthermore, the same $2,000 I charged for investment, tax, retirement, insurance, and estate advice on $2.2 million is equivalent to an annuity worth $26,666 at 7.5% commision that’s suitably invested. There was no tax advice, no estate review, and no retirement plan. I’m sure they’ll offer insurance needs analysis that’ll result in a definite need for insurance which in turn will lead to more commissions. And the $26,666 annuity client probably doesn’t know their paying $2,000.

So, do you think someone giving you financial advice should have to put your interest before their interest? How about transparent fees?