I recently read a great article by Ilan Moscovitz in The Motley Fool that addresses the different requirements for those calling themselves “financial advisors.”
The piece explains how Obama’s administration is trying to change a long-standing double standard in financial advisory services. Your advisor may not have your best interests in mind. As the law currently stands, broker dealers, insurance salespersons, and advisors operating under the “suitability standard” are merely required to ensure an investment is suitable for a client at the time of the investment. Suitability means that the advice must be “suitable,” but not necessarily in the best interest of the client.
Those working under the suitability standard are typically paid on transactions, often by specific fund companies to sell their funds. Sometimes these funds cost you more. In fact, Obama’s team estimates the cost is up to 1% of your investment, or $17 Billion in the U.S.i
This contrasts with the “fiduciary standard” where registered investment advisorsii must always act in the client’s best interest and must disclose conflicts of interest. These advisors are typically paid not by the fund companies they recommend, but by their clients.
The difference can be very real for you the investor. The Motley Fool estimates that if, at age 45, you roll over your 401(k) into an IRA with an advisor who gives conflicted advice, you might, on average have 17% fewer savings by age 65.
Moscovitz uses a great analogy with “Doctor” capitalized or “doctor” not capitalized to explain this.
The question you need to be asking your advisor: “Do you have a ‘fiduciary standard’?” If the answer is “no,” you may want to dig deeper into potential hidden costs that you’ve paid and ask your advisor how much he/she has made on the investments recommended to you in the last two years. You may want to consider moving to an advisor who is required to put your interests ahead of their own.