Charleston Financial Advisors - Fee-Only Financial Planning, Asset Management, Charleston, SC

Words of Wisdom

Words of Wisdom

Look Out for Number One

Generally, looking out for your own interests rather than those of other people is not considered a positive attribute.  But when it comes to looking for financial planning and investment advice, you should do exactly that.  Understanding the standard of care required by your advisor is one way to look out for yourself. 

Suitability Doctrine or the Fiduciary Standard

In the world of investment advice, your advisor’s standard of care generally falls in one of two categories:  the Suitability Doctrine or the Fiduciary Standard.  The suitability doctrine, often referred to as the “know-your-customer rule”, is a guideline which merely requires that a broker have a reasonable basis for recommending an investment or insurance product.  In contrast, advisors who adhere to a fiduciary standard are required to put their clients’ interest before their own in making investment decisions.

This may just seem like a lot of semantics, but it’s not.

Let’s say, for example, you have $10,000 a year to save for retirement.  Your advisor could recommend a low-cost investment that you might net after expenses 8% a year.  After 30 years, you would have accumulated more than $1.1 million.

Now consider your advisor could earn a big commission for recommending a higher-cost product being promoted by his firm.  Instead of netting 8% a year, you might net 6%.  Thirty years later, your account would grow to under $800,000 – more than a $300,000 difference. 

The high-cost investment might be perfectly “suitable”, since it meets your financial objective of saving for retirement, but was the investment “in your best interest”?

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Fiduciary or not? 

In the financial-services world, there are three job titles that require a fiduciary standard:

  • Attorney

  • Certified Public Accountant (CPA)

  • Registered Investment Advisor

Advisors who are stock brokers (also known as “registered representatives”) or insurance agents are not held to a fiduciary standard and can put their interests, or their firm's, ahead of yours.

 Ask the tough Questions 

You deserve to know the level of care you will receive.  Be proactive and ask the tough questions.  For an advisor questionnaire, go to Focus on Fiduciary .  After all, if you don’t look after your own best interest, it is hard to expect someone else to.