When you hire a financial advisor, it should be safe to assume that he or she is working in your best interests—that every piece of guidance you receive will be based purely on helping you meet your goals.
The reality, however, is very different. While consumers may take for granted that advisors will put their interests first, the great majority of advisors work within business models that do not require this.
Just 15% of advisors operate under what’s known as the fiduciary standard, which obligates them to act in clients’ best interests at all times. The other 85%? They operate under a much looser standard, known as the suitability standard, which is notorious for enabling conflicts of interest.
How is this possible? Isn’t a financial advisor a financial advisor? This brings us to the industry’s dirty little secret: Most “advisors” are technically investment brokers. Brokers, to be very clear, are salespeople. While they usually offer planning and other kinds of financial advice, their compensation is based on earning commissions when clients buy investments through their firm. And the amount of these commissions will vary based on the products they sell.
Needless to say, this business model creates incentives to make recommendations that may not be in clients’ best interests. But there is an even broader conflict of interest embedded within the brokerage industry. Brokers are not independent, objective financial guides, but rather employees of firms like Merrill Lynch, Edward Jones, Morgan Stanley or Prudential.
As employees, their first obligation is to their employers, not their clients. Again, it’s an open secret within the industry that brokers face pressure from their employers to push certain products, rather than making completely objective recommendations.
Are most brokers good people who are in the business for the right reasons? Of course they are. But the truth is that brokers work in a conflicted business environment, one in which your success may be in competition with the success of the broker and his employer. And because brokers tend to use the “advisor” title, it may not even be clear that they’re brokers.
So how can you be sure the advisor you hire will provide you with un-conflicted advice? The first step is to work with an independent, fiduciary advisor. Most fiduciary advisors are known as registered investment advisors (RIAs). RIAs are regulated by the Securities and Exchange Commission as fiduciaries. Brokers, on the other hand, are regulated by FINRA, their industry’s “self-regulatory organization.”
RIAs, such as Steel Peak Wealth Management, are legally bound to put your interests first. And RIAs’ business model reinforces that standard of objectivity: RIAs are typically compensated through a set fee. This arrangement reduces or eliminates conflicted advice.
Furthermore, since the fees that RIAs earn are based on the amount of assets they managed, the fiduciary advisor is incented to make the kind of sound decisions that will sustain and grow your assets. In the event that conflicts of interest arise, fiduciary advisors are legally obligated to fully disclose those conflicts.