Business is built on trust. Good businesses always put the customer’s interests first.
Over time, the customer trusts that this business will deal with them fairly. If a customer repeatedly gets a good deal, they will want to come back to that business and they will recommend it to others.
In the financial advisement business, trust is the key.
Investment professionals pride themselves on building trust in same way other businesses do. Lately it seems like everyone offers “investment services.” Unfortunately most investors aren’t exposed to basic financial literacy experiences that allow them to easily decipher the good investment adviser from the bad.
Consequently financial service “sharks” are able to take advantage of this widespread “financial illiteracy.” These sharks hope you will buy into the notion that finances are just too complex and their offer to “take care of you” will make it all better. In the financial world these cynical sharks come at you with “safer” and “simplistic” investment products that really are complex and carry a nice fat fee for themselves.
In order to discern good from bad investment advice, investors should start by understanding their financial advisors legal obligations to you and how they compensated for providing you advice.
Fiduciary standard versus suitability standard
Class, sit up. Today’s financial literacy vocabulary term is: fiduciary. A fiduciary is someone who must legally put your interest first.
The first question in your evaluation of an advisor is, “Is my advisor a fiduciary?
An investment fiduciary is legally bound to put your interests first. A state registered or federally Registered Investment Adviser (RIA) subject to the Investment Advisors act of 1940 is a fiduciary.
A fiduciary financial professional who is advising you about investments has a legal obligation to recommend investments that are best for you.
On the other hand, investment brokers are working under a “suitability standard.” According to the Securities and Exchange Commission website brokers must ensure that an investment is “suitable” or appropriate for the investor given the investors willingness and ability to take risk.