By: Matt Meyer
Matt Meyer, co-founder at The BluePrint Insurance services is a contributor for Nasdaq.com. The below article can also be viewed at Nasdaq.com. Please click here.
The word "fiduciary" gets thrown around a lot these days. But what does it mean? According to Investopedia, a fiduciary is "a person or organization that acts on behalf of another person or persons, putting their clients' interest ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary thus requires being bound both legally and ethically to act in the other's best interest."
It makes sense why this definition has led so many financial advisors to proudly market themselves as a "fiduciary" or "fee-only." By this definition, it says that they are more trustworthy than other financial advisors.
Whatever the case, I thought it would be fun to take a closer look at what it means to be a fiduciary and the dilemma I believe it has caused some advisors.
I know this topic can be sensitive from my interactions, so please view my comments as a genuine conversation about the topic.
Shouldn't actions speak louder than words?
Some professionals view accepting commissions as evidence of someone potentially being unethical. An advisor who accepts a commission could potentially be incentivized to offer that particular investment, thus potentially not acting in the client's best interest.
The "fee-only" crowd will cite that their fee is aligned with the client's best interest because they are not incentivized to offer one investment over another. Maybe this is all true, but I don't think a label of "fiduciary" or someone taking a commission can correctly label an entire industry of people.
I know plenty of "fee-only" advisors who charge fees that don't necessarily line up. For example, they charge one client 1%, perform certain activities, and then charge another client 1% and perform fewer activities. Or perhaps worst yet, they charge 1% to a client with $500k and 1% to a client with $1 million and do the same activities. So why does one person pay twice as much for the same services?
I am not trying to pick a fight with my "fee-only" friends but simply want to help us consider that maybe both the commission and fee models need to evolve. Or at a minimum, we need to rethink the labels and marketing around those labels, because our actions as professionals speak louder than how we label ourselves.
Should every fiduciary be required to take a comprehensive approach?
This is a topic that is dear to my heart. My company's approach is to help financial advisors offer a more comprehensive client experience. I see too many advisors focus solely in one area like investing or financial planning. They may dabble in planning for some clients but not for all.
The smallest percentage makes the risk management conversation we offer part of their business model. Some will only talk about it if the client asks. Can someone really be doing what is in their clients’ best interest without looking at the whole picture?
If a family comes to an advisor for investment help, don't we need to ask what the goals are beyond risk tolerance? Isn't there more to getting to the goal than the portfolio or product being offered? Are there risks that exist that could keep their family from their goals?
For me, the "fiduciary-like advisor” is the one taking the time to understand and discuss these life circumstances. I don't care if they received a commission when they helped me get a term policy to protect my family. The alternative would be them not talking to me about the risks and thus never getting the protection.
In that example, which outcome is in the client’s best interest?
What does it mean to be a fiduciary when dealing with insurance products?
We have the pleasure of partnering with hybrid and "fee-only" financial advisors. A common dilemma that arises with our "fee-only" partners comes up with certain insurance products.
We work hard to get advisors to offer a comprehensive client experience, and we provide simple ways to integrate the risk management conversation into their process. Inevitably a "fee-only" advisor will bring us a client situation.
We will ask them if they want to see the "fee-only" solutions, commission solutions, or both. Many times, they will ask to see to both to compare, or they will say, "I want the one that is better for the client." And with that statement, there lies the dilemma because often, the commission solution provides more benefits to the client.
So, what is the right decision for the advisor? Do they give the client the one with more benefits based on their need or goal, or do they offer the one that may come close but doesn't pay a commission?
We don't need to come up with a blanket answer for everyone but merely an everyday example to ponder.
I believe we shouldn't care about labels but be completely focused on the end-client we serve. Without them, there is no market for our services and products.
We can all evolve and get better. The institutions can evolve by creating better products and solutions. Financial advisors and other professionals can evolve and improve the services and experience that they provide.
If most of us are focused on these goals, the industry progresses, and the "bad apples" will be minimized to the point of non-existence.