Recently I came across an article on Forbes.com titled The 6 Kinds of Financial Planners: Pick One. There was something in that article that did not sit well with me – because it was completely and utterly wrong.
My problem is not with the author’s claim that there are 6 types of planners (although I could argue that point), or even with the descriptions thereof (where there is also room for discussion), but rather with the heading that precedes the body of the article. My point of contention stems from the phrase “Whether advisors are "fiduciaries" doesn't matter. How much they know does.”
This statement is not only wrong, but it is patently absurd and should make us all wonder whether the author is even qualified to opine of the types of financial planners/advisors/brokers or any financial matter whatsoever.
Is it critical to work with someone who is knowledgeable in the field in which they claim to be an expert and for which you pay them? Yes. Absolutely. Without a doubt. That part of the statement holds true.
Does it matter whether they are a fiduciary or not? Also, Yes! It is equally as important that they be a fiduciary, contrary to what the article would have you believe. Why the author would take this point of view is a mystery to me.
Here is why it absolutely does matter whether an advisor or planner is a fiduciary or not. A fiduciary is legally required to work in your best interest, non-fiduciaries do not have the same legal requirement. Let me repeat that: fiduciaries, legally must work in your best interest while non-fiduciaries are held to a much laxer legal standard.
When there is an asymmetry of information between you and a service provider (which we are assuming there is given the very nature of hiring a financial professional) then you would naturally want as strict a legal standard in place as possible to protect you in the event of fraud or otherwise poor decisions.
In other words, if push comes to shove and the worst-case scenario unfolds and you find yourself facing from your now former advisor in court, you stand a much higher chance of winning against a fiduciary than against a non-fiduciary. They are held to a higher standard of care. A non-fiduciary can make sub-optimal financial decisions on your behalf while enriching themselves and still not be liable for any losses or missed opportunities because the standard they are held to is inferior!
Would you allow a surgeon to perform on you who did not take the Hippocratic oath to do no harm? Would you hire roofers who were not properly insured? Unless you love living on the edge you probably would say no. There is no reason to take unnecessary risks, particularly when there is no upside to such a decision, only a very large downside. Why then would you ever consider doing so with something as important as you financial well-being?
Additionally, I would argue that if your planner truly did know a thing or two about the industry, he or she would have no problem accepting the stricter standard of care and would align their business appropriately. Trust me, it can be done, I’ve done it with my firm. Also, the argument that costs are too high does not hold water. Again, I know from experience. I hold myself to the fiduciary standard and comply with all necessary bureaucratic red tape to affirm as much. Yet somehow still manage to provide more attractive pricing to my clients than most, if not all, of those complaining about increased costs.
In all practicality, I suspect the statement at the beginning of the Forbes article was more about the author’s political or business affiliations rather than costs or doing right by their clients. If one is truly working in the best interests of clients then there is no reason to fear being held to such a standard – unless you have some conflict of interest you’d rather not see the light of day.
Read the original Forbes article and judge for yourself by clicking here.