It’s Time for CPAs to Demand Their Clients’ Advisors Follow a Fiduciary Standardby
Your clients, as investors, put a lot on the line – building wealth and safeguarding their ability to retire – and if they have an advisor to help, they typically place an incredible amount of trust in them.
As a CPA myself, I recognize that most investors place their greatest trust in their CPAs and look to them to provide counsel on who can provide them with financial advice free of conflict. With that responsibility, you want to make sure you are fully considering financial advisors who will serve your clients in an unbiased way, helping to protect and grow their wealth as a member of their professional consulting team.
Most people are under the impression that advisors have a legal responsibility to act in their client’s best interest – and it makes sense they would think that. The advisors (e.g., brokers, registered representatives, insurance agents) are licensed individuals who are smart and, presumably, well-trained. The truth, however, is that many advisors are not legally required to act in their client’s best interest. As unbelievable as that sounds, their advice can, legally, involve self-serving motives that drive conflicts of interest – at your client’s expense.
As I’m sure you’ve noticed recently in the headlines, the US Department of Labor has proposed a ruling that will require all investment advisors – independent advisors and broker-dealers – to adhere to a fiduciary standard of care for all retirement accounts. This, in turn, would eliminate commission-based retirement accounts and expand the scope of advisors who operate on a conflict-free basis.
The push to change that potential conflict of interest is being met with a ton of resistance from many of the largest names in the investment and insurance world.
Many advisors, notably those who work for brokerage firms and insurance companies, are required to abide by a standard of advice we all know as the “suitability standard.” In our world, this means that those who operate by this standard must merely avoid selling unsuitable investments, which may or may not be in the client’s best interest – a “loophole” seemingly a mile wide.
Financial advice professionals who work with a registered investment advisor (RIA) are held to a different standard. This is where the fiduciary standard comes into play. That is to say that an RIA has to, legally, put the client’s needs before all else – a standard that most investors, potentially your client, assume their advisor operates under.
Most advisors who operate under the suitability standard are honest people who are doing great work for their clients. However, they live in a world where there are inherent conflicts of interest everywhere. Although these conflicts are overcome by the honest majority, the fact that these conflicts are allowed to exist – and are legally defensible – is unacceptable.
A Different Time
Why does this legal discrepancy exist for financial advice professionals? It harkens back to the days when stockbrokers merely carried out trades that clients requested, instead of offering broader guidance on how to achieve one’s lifetime financial goals. Those days are gone. Today, people technically classified as stockbrokers present themselves as performing many of the same services as RIAs, yet they are held to an antiquated and inadequate standard.
Confusion among investors about these two systems contributes to public mistrust of financial professionals. Ironically, that general mistrust keeps too many people from getting proper guidance – especially those who could benefit from a better approach to saving money and generating wealth.
Call to Action
The Labor Department ruling is quickly approaching; however, it still faces opposition. Implementation will be complex and will likely change form as time goes on. You should counsel your client to ask the question: “Does your advisor have to follow the fiduciary standard? If not, why not?”
If the industry was sincerely interested in providing good advice, free of conflicts of interest, it would be strongly in favor of fiduciary becoming the universal standard. Unfortunately, the amount of money that Wall Street firms and insurance companies pocket will keep them spending millions on lobbyists in order to maintain the suitability standard – no matter how silly their rationale sounds to the average investor.
I look forward to the day when I no longer have an ethical advantage over other financial professionals because then we will all be acting in the best interests of our clients and their families – just like a CPA.
Kevin Leahy, CPA, is founder and CEO of Connecticut Wealth Management LLC, a registered investment advisor with more than $500 million in assets under management, based in Farmington, Connecticut. He provides comprehensive personal financial and estate planning services,...