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Not Knowing the Difference Between a Fiduciary Advisor and a Suitability Broker or Agent Could Be Very Costly Thumbnail

Not Knowing the Difference Between a Fiduciary Advisor and a Suitability Broker or Agent Could Be Very Costly

When working with a financial advisor, how do you know whose best interest they are putting first--yours or theirs? If the advisor is required to put your best interests first, then they are operating under what’s called the fiduciary standard. If they are legally able to put their own interests before yours, then they are operating under a less stringent standard called the suitability standard.

At Keen Wealth Advisors, we make it very clear upfront through our “standards of engagement” that we operate under the more stringent fiduciary standard. It helps shape the nature of the working relationship between us and our clients.

We’ve been getting a lot of questions about the differences between the fiduciary and the suitability standard because of legislation that is scheduled to take effect in April 2017. There is some talk, though, that President Trump and the new Congress may delay the implementation of these changes.

On today’s show, we discuss these standards, what changes may be coming, and how to understand the costs of your investments.

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Insights from Today’s Podcast on Suitability vs. Fiduciary Standard

Broadly speaking, suitability and fiduciary are two legal standards for the advice and recommendations given to clients. Each is a bar that has to be cleared when recommending investment products and laying out a financial plan. But one bar is set a lot higher than the other.

1. Your money … But whose best interest?

Today, a large percentage of investment transactions are executed under the lower-level suitability standard. Unfortunately, many people don’t realize that this standard may not be in your best interests. Brokers who only clear what I like to call “the low bar of suitability” are, most likely, providing their clients with a less-than-thorough consultation that may not result in a solid, comprehensive financial plan.

At worst, low-bar brokers could be pushing high-cost products that aren’t optimal for their clients, but instead, help the advisor hit sales targets and earn bonuses, monthly sales contests, etc.

2. “Fidere” -- to trust

The word “fiduciary” comes from the Latin word for “trust.” Registered investment advisors, like my team at Keen Wealth Advisors, are held to the fiduciary standard. We are legally accountable for acting in our clients’ best interests. By definition, we have to develop thorough, on-going relationships with our clients so that we can make continued recommendations that are in our clients’ best interests. This is a relationship based on disclosure, transparency, and trust. The fiduciary standard we adhere to at Keen Wealth Advisors puts the onus on us, the advisors, to monitor our client’s investments, alert them to potential problems and opportunities, and make recommendations in their best interests. In the "suitability world" the onus is on the client to monitor their own situation as the sales person is only required to make sure the investment was "suitable at the time of sale" to the client.  Most investors have no knowledge of these very meaningful differences.

3. Clearing the fiduciary gap

New legislation that is set to go into effect on April 10, 2017 will require, among other things, that all advice given on retirement accounts will have to follow the fiduciary standard--that’s good. Unfortunately, these changes will not apply to any taxable accounts. Roughly 75% of all investment accounts are taxable accounts, so if you’re not working with a fiduciary advisor, then you may be getting advice that just clears the lower-level suitability standard.

As with proposed changes to the Roth IRA, we have to wait and see how the final laws are implemented. But at Keen Wealth Advisors, we already operate to the fiduciary standard not only with IRA accounts and retirement accounts, but also with taxable accounts. We think the Department of Labor’s changes are a big step in the right direction.

4. Know your costs and services

It’s important to understand what your investments are going to cost you and to determine up front, in writing, what services you will be provided.

Too many people I talk to are focused on just the advisor’s fees, which are only part of a bigger picture. For example, those fees aren’t going to include any commission potentially loaded onto the front or back of an investment product or any  additional, ongoing fees for the life of the product that a broker may not disclose.

I recommend that instead of asking an advisor about his or her fees, ask “What is my total cost going to be for this investment?” And then make sure you talk to your advisor about how these investments might affect your income and taxes once you do retire.

Conflicted advice from advisors who operate under the lower-level suitability standard can be costly. A report from the Obama White House Council of Economic Advisers shows conflicts of interest cost middle-class families who receive conflicted advice huge amounts of their hard-earned savings. It finds conflicts likely lead, on average, to:

  • 1 percentage point lower annual returns on retirement savings.
  • $17 billion of losses every year for working and middle class families.

At Keen Wealth Advisors, we base our recommendations on our personal knowledge of each client, and we hold our planning to the highest fiduciary standards. Make sure the person managing your future does the same.

 Bill Keen on choosing the right advisor ...

“Make sure you are getting value for the financial products and services you pay for, and that the terms of your engagement with an advisor are fully disclosed and documented.”

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Got a question or comment? Email it to me and we'll get back to you or call our office at (913) 624-1841. 

About Bill

Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.

KWMG, LLC’s dba Keen Wealth Advisors (“company”) is an SEC Registered Investment Advisor located in Overland Park, KS. The company and its representatives may only conduct business in those states where registered or where excluded/exempt or from licensure. For registration information please contact the SEC or the state securities regulators for the states where the company is notice filed. A copy of the company ADV is available upon request. Advisory services are only offered to clients or prospective clients where the company and its representatives are properly licensed or exempt from licensure. No advice may be rendered by the company unless a client service agreement is in place. This information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy and is for illustrative purposes only. Clients and prospective clients must consider all relevant risk factors involved with each strategy, including costs or fees, and their own personal financial situations before trading.

The views outlined in the book, Keen on Retirement Engineering the Second Half of Your Life, are those of the author and should not be construed as individualized or personalized investment advice. Any economic and/or performance information cited is historical and not indicative of future results. Economic forecasts set forth may not develop as predicted.

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