What’s so Great About the Fiduciary Standard?

What's so Great about the Fiduciary Standard?

We’ve talked about the importance of the fiduciary standard quite a bit in the past. As you may have seen, both the Department of Labor (DOL) and Securities and Exchange Commission (SEC) are looking into rules to force brokers to follow a fiduciary standard, as opposed to the “suitability” standard that they have used in the past (don’t worry, we’ll explain all of this). Well, it looks like the DOL is planning to release their version of the standard this coming Wednesday. We couldn’t be more excited.

Like a lot of really important issues, the fiduciary standard can seem pretty esoteric. Basically, this whole debate of fiduciary vs. suitability boils down to what sort of advice brokers have to provide.

The suitability standard, which is the one currently in use by brokers, requires that investment advice be “suitable,” which basically means it can’t be blatantly wrong. In other words, you can’t sell a ninety-year-old living off of Social Security a portfolio of penny stocks. Beyond that, it’s pretty wide open. To be clear, not every broker is trying to do stuff like this, but there are folks out there who are. And that’s a serious problem.

The fiduciary standard means brokers will need to put their clients’ interests first. They can’t just recommend what is “suitable,” they need to focus on what is best for the client. Like all Registered Investment Advisors, we’ve operated under the fiduciary standard for a very long time. It’s also the standard that pretty much every trusted professional position follows. Every industry has a slightly different take on the standards, but the core remains the same – your highest duty is to the client, not to your employer or your wallet.

The problem here is one of trust. If I go to a Ford dealership, I know the salespeople there are going to try to sell me a Ford. There’s a big Ford sign right over my head, and everyone understands the deal. They aren’t trying to convince me that they are unbiased and will help me find the objectively best car for me. They may help me figure out which Ford is the best car for me, but they aren’t going to recommend that I head over to the Toyota dealership down the street.

Brokers tell people that they should trust their advice, that brokers aren’t salespeople. The industry has been trying to rebrand brokers as financial advisors and consultants, even though they’re still living under the old suitability standard. As long as something wasn’t outright theft or egregiously wrong, everyone has been pretty much in the clear. That’s not to say that every broker was out there pushing things that weren’t in their clients’ best interests to get bigger commission checks, but a lot were.

There’s nothing wrong with salespeople – we are all salespeople to greater or lesser degrees. The problem is that when someone holds themselves out as someone that you should trust—especially for something as important as your finances—there shouldn’t be any wiggle room. I know what I’m getting when I talk to a Ford salesperson. I don’t know what I’m getting when I talk to a broker who operates under the suitability standard. Making brokers follow a fiduciary standard goes a long way toward solving this.

As great as a fiduciary standard is though, there are two big issues. The first is what the standard will actually look like when the lobbyists are through with it, and the second is when it will actually be implemented. As you can probably imagine, Wall Street is not a big fan of the fiduciary standard. The more they have to pay attention to investors’ best interest, the less money they can make selling stuff. They will want to keep the standard as weak as possible and, failing that, keep it in limbo indefinitely.

If you, or someone you know, wants a second opinion on their portfolio, or wants to work with someone who will put their interests first, give us a call. We would be happy to talk.


McLean Asset Management Corporation (MAMC) is a SEC registered investment adviser. The content of this publication reflects the views of McLean Asset Management Corporation (MAMC) and sources deemed by MAMC to be reliable. There are many different interpretations of investment statistics and many different ideas about how to best use them. Past performance is not indicative of future performance. The information provided is for educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy or sell securities. There are no warranties, expressed or implied, as to accuracy, completeness, or results obtained from any information on this presentation. Indexes are not available for direct investment. All investments involve risk.

The information throughout this presentation, whether stock quotes, charts, articles, or any other statements regarding market or other financial information, is obtained from sources which we, and our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Neither our information providers nor we shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in the transmission there of to the user. MAMC only transacts business in states where it is properly registered, or excluded or exempted from registration requirements. It does not provide tax, legal, or accounting advice. The information contained in this presentation does not take into account your particular investment objectives, financial situation, or needs, and you should, in considering this material, discuss your individual circumstances with professionals in those areas before making any decisions.

 

McLean Asset Management Corporation (MAMC) is a SEC registered investment adviser. The content of this publication reflects the views of McLean Asset Management Corporation (MAMC) and sources deemed by MAMC to be reliable. There are many different interpretations of investment statistics and many different ideas about how to best use them. Past performance is not indicative of future performance. The information provided is for educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy or sell securities. There are no warranties, expressed or implied, as to accuracy, completeness, or results obtained from any information on this presentation. Indexes are not available for direct investment. All investments involve risk.

The information throughout this presentation, whether stock quotes, charts, articles, or any other statements regarding market or other financial information, is obtained from sources which we, and our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Neither our information providers nor we shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in the transmission there of to the user. MAMC only transacts business in states where it is properly registered, or excluded or exempted from registration requirements. It does not provide tax, legal, or accounting advice. The information contained in this presentation does not take into account your particular investment objectives, financial situation, or needs, and you should, in considering this material, discuss your individual circumstances with professionals in those areas before making any decisions.