Communicating the Value of the Fiduciary Standard to Clients

Communicating the Value of the Fiduciary Standard to Clients

When women are armed with a clear and concise set of questions for vetting their current advisor, they become empowered and engaged in their finances.

Let’s suppose you have the choice of seeing one of two doctors for an allergy problem. The first physician, Dr. Jones, has a practice that is, in effect, financially supported by Pharmaceutical Company A. Every time Dr. Jones writes a prescription for one of Company A’s drugs, he accumulates points towards a year end “bonus.” Your body, however, responds best to an allergy medicine produced by Pharmaceutical Company B. Nevertheless, Dr. Jones writes you a prescription for Company A’s drug, and doesn’t go into detail about why. Dr. Jones is allowed to do this because the drug is “suitable” for your allergy problem. By contrast, Dr. Smith runs a fully independent practice and prescribes you Company B’s drug. Which doctor would you rather see?

For the vast majority of people, the answer is pretty straightforward. They choose the service provider whose business model comes without an inherent conflict of interest.

Alas, in the financial world, finding that conflict-free advisor can be relatively confusing. That’s because there are actually two different standards of care to which those offering financial help to individuals can be held: the “suitability” standard and the “fiduciary” standard. The difference between them is as stark as the one between our two hypothetical doctors, and wildly misunderstood by the broader marketplace.

Enter women. In my role as Director of Wealth Strategies for Women at Buckingham and The BAM Alliance, time and again I hear woman investors describe a nagging distrust for the financial services industry. I’ve even heard the experience of meeting with a financial advisor compared to shopping for a used car.

What I’ve come to observe is that when women understand the structural distinctions between “suitability” and “fiduciary,” which requires that a client’s best interest always come first, they respond with relief. They realize that the sinking feeling they’ve had during conversations with “advisors,” and the suspicion that something not really in their best interest is going on behind the scenes, is unfortunately all to accurate.

Additionally, I’ve observed that when women are armed with a clear and concise set of questions for vetting their current advisor, they become empowered and engaged in their finances. And here’s the kicker for our industry. When women get answers they like and feel a passionate connection to a service provider, they can be referral machines.

What I have found missing from the broader dialogue about the suitability versus the fiduciary standard, and from in mainstream publications, is a plain-English differentiation between the two.

So, for advisors wishing to help potential and current woman clients understand this dichotomy, here’s the framework I’ve found most effective.

 

This Business Model…Is Just Not That Into You

At its core, the debate between “suitability” and “fiduciary,” in my opinion, boils down to dueling, entrenched business models.

On one side we have the traditional, large broker-dealer firms. In the old days, they used to call their retail, client-facing staff “brokers.” More recently, the industry has shifted to calling these folks “financial consultants” or “financial advisors.” These firms are overseen by FINRA, a self-regulating industry organization.

Let’s break down the term “broker-dealer.” A dealer maintains their own account, selling inventory to, and buying inventory from, others (earning a spread on the difference). The SEC defines brokers as financial intermediaries who connect individual investors with potential investment opportunities. Importantly, the SEC also defines a broker as someone who is acting as an agent for someone else (namely their firm, not the end client). This distinction is hugely important. It implies that the broker’s first loyalty is to their firm, not ultimately to their client.

Women, it seems, are able to intuitively sense this ready-made conflict. The message we receive is this: Firms operating under the suitability standard are really just not that in to us.

Relax, We Have Your Back

On the other side we have registered investment advisory firms (RIAs), whose retail, client-facing staff may be called “financial advisors,” “wealth managers,” “portfolio advisors” or “investment advisors.” The similar naming conventions create instant confusion about whether someone is operating under the RIA model or the broker-dealer model.

But legally, RIA firms and their advisors operate under a very different regulatory structure: the Investment Advisors Act of 1940 and, yes, the SEC. This binds them, legally, to a “fiduciary” standard. This standard requires that advisors put their client’s interest ahead of their firm’s or their own.

This kind of legal/regulatory mumbo jumbo is enough to make any rational consumer’s head spin. It also explains one key reason why women’s rate of dissatisfaction with the financial services industry historically has been so high.

And therein lays the opportunity for fiduciary advisors. Helping your prospective and current clients understand the difference between these dueling business models, and the enormous value of the fiduciary standard, leads to both happier clients and increased referrals.

 

Manisha Thakor is Director of Wealth Strategies for Women at Buckingham & the BAM Alliance

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