The Value Of Good Advice And How To Tell If You’re Getting It
August 3, 2023The economic and market turmoil during the past year, most of it caused by the pandemic, has brought into sharp focus for many investors the vital importance of dependable, professional advice about investments and financial planning. Especially when emotions are high, having an experienced wealth manager who is ethically and professionally committed to providing counsel that places the client’s best interest ahead of everything else can be a crucial shelter in the storm.
But much hangs on the interpretation of the phrase, “the client’s best interest.” It may surprise some readers to learn that not all financial professionals share an identical understanding or definition of what constitutes the client’s best interest. Even among those who work directly with clients’ investments in the financial markets—those who handle stocks, bonds, mutual funds, and other listed securities—can differ in their approach to working in the client’s best interest.
Advisor Representatives, are individuals that typically hold credentials such as CERTIFIED FINANCIAL PLANNER™ or CFP® professional, Chartered Financial Analyst (CFA®), Certified Private Wealth Advisor (CPWA®), or Accredited Investment Fiduciary (AIF®), and are regulated by the Securities and Exchange Commission (SEC) under the Registered Investment Advisers Act of 1940. As such, these professionals and their Registered Investment Advisor firms are required to apply the fiduciary standard in their dealings with clients, They must apply what the Cornell Law Dictionary terms “the highest standard of care,” acting always in the client’s best interest, even if that is contrary to the advisor’s own interests. Among other things, this means that a fiduciary advisor will:
- Act with undivided loyalty and utmost good faith.
- Provide full and fair disclosure of all material facts, defined as those which “a reasonable investor would consider to be important.”
- Not mislead clients.
- Avoid conflicts of interest, such as when the advisor profits more if a client uses one investment instead of another or trades frequently and disclose any potential conflicts of interest in advance and in writing.
- Not use a client’s assets for the advisor’s own benefit or the benefit of other clients.
- Most often, fiduciary advisors are paid by a fee that is based on the value of the assets they are managing for the client. Thus, as the client prospers, so does the fiduciary advisor—and if the client’s value goes down, so does the fee payable to the advisor. Such types of advisors and planners are often referred to as “fee-only” advisors or financial planners.
Other financial professionals are subject to a different type of oversight, however, and may operate according to a different standard. Broker-dealers, insurance agents, and others who may provide financial advice in addition to selling products are allowed to operate according to a “suitability standard,” which means that they may legally make a recommendation to a client as long as they believe the recommendation is “suitable” for the client’s needs. Often, these individuals are compensated by commissions paid for the sale of products. Rather than regulation by the SEC, these professionals are regulated by the Financial Industry Regulatory Authority (FINRA), a private corporation recognized by the government as a self-regulatory entity for the industry.
In June 2019, the SEC enacted its Regulation Best Interest (“Reg BI”) in an attempt to address the imbalance between the expectations for fiduciary advisors as compared with those under FINRA regulation. While Reg BI bans the use of product-specific sales contests and similar practices that could lead to pushing a product as “suitable” primarily because of the benefit it generates for the salesperson, many broker-dealers are still deficient in their practices. For example, in a report published in January 2023, examinations performed by the SEC revealed that many broker-dealers still exhibited deficiencies in conforming to the standards of Reg BI with respect to maintaining proper written policies and procedures for achieving compliance with Reg BI, with properly disclosing conflicts of interest, and with proper disclosures of various roles occupied by firm personnel. In other words, investors seeking the highest standard of care will need to continue exercising caution in taking any securities professional title at face value and may avoid confusion by simply asking their investment professionals whether or not they are receiving a fiduciary standard of care.
To learn more, read our article, “What Is a Fiduciary Financial Advisor?”
Modera Wealth Management, LLC (“Modera”) is an SEC registered investment adviser. SEC registration does not imply any level of skill or training. Modera may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. For information pertaining to Modera’s registration status, its fees and services please contact Modera or refer to the Investment Adviser Public Disclosure Web site (www.adviserinfo.sec.gov) for a copy of our Disclosure Brochure which appears as Part 2A of Form ADV. Please read the Disclosure Brochure carefully before you invest or send money.
This article is limited to the dissemination of general information about Modera’s investment advisory and financial planning services that is not suitable for everyone. Nothing herein should be interpreted or construed as investment advice nor as legal, tax or accounting advice nor as personalized financial planning, tax planning or wealth management advice. For legal, tax and accounting-related matters, we recommend you seek the advice of a qualified attorney or accountant. This article is not a substitute for personalized investment or financial planning from Modera. There is no guarantee that the views and opinions expressed herein will come to pass, and the information herein should not be considered a solicitation to engage in a particular investment or financial planning strategy. The statements and opinions expressed in this article are subject to change without notice based on changes in the law and other conditions.
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