The Two Most Important Words in Advising

Kendall King, a partner and advisor here at Legacy Financial Group, linked to a great article on Financial Advising today on his twitter feed.

The link can be found here or if you follow Kendall on twitter (@kendallwking) it can be found there as well.

The most important words from this article are: "Fiduciary Standard."  There are several definitions of what a "Fiduciary" is, but they all say the same thing.  I will use the definition presented on the Fool.com website which is where the article in reference is taken from.

Fiduciary: A professional or institution that takes on the duty to manage assets in the best interests of clients over the fiduciary's own interests, avoiding any conflict of interest. 

Sounds like something all financial advisors should be held to right? Well, guess what?  Many are not.  Nearly all commission based advisors are held to a much less stringent "suitability" standard.  Which is to say, the product they sell you does not have to be the best choice for you, it just has to be "suitable."  That gives them free reign to give you the product that pays the highest commission even though it may not be in your BEST interest.  It also give them the ability to partake in revenue sharing agreements with mutual fund companies, a clear "conflict of interest."

So here are two points to consider:

1) Why would you want anything else than the highest legal standard of ethical responsibility in your advisor?

2) Why would an honest and ethical advisor not choose to hold themselves to a "Fiduciary Standard"?

All Fee-Only advisors are held to this standard.  Commission based advisors are free to sign a Fiduciary Pledge which holds them to the higher standard.  If they are not willing to do this then run away, quickly....