The Fiduciary Standard
In the investment world, there are two different standards that Investment Advisors and Broker Dealers must follow. Many people consider the advice that they receive from both parties as similar, but there are differences that most may not know. This article focuses on the company that you’re doing business with and how it is regulated. Employees of each will follow the same standards as their company.
Investment Advisors provide many services regarding financial decisions from planning for a child’s education, to retirement, and developing strategies to manage portfolios to reach a targeted outcome. They charge fees for their services which could be a percentage of the assets they manage for a client or an hourly fee; or they may charge commissions based on trades they make for their clients.
Investment Advisors are bound by a fiduciary standard that was established as part of the Investment Advisors Act of 1940. Investment Advisors can be regulated by the SEC(Securities and Exchange Commission), or by state regulators, both which require investment advisors to put their client’s interests above their own. Their duty is to provide both loyalty and care to their client, and always place trades under “best execution”, which means at the best combination of low cost and efficiency of execution. They must also ensure the purchase, trade, or execution is suitable for the client.
Brokers can also develop strategies and provide services for the same types of investments that an investment advisor does. Instead of having to place their own interests below that of their client, they only need to ensure that the investment they are proposing is suitable in terms of the client’s needs and objectives. This is referred to as the “suitability obligation.” Suitability includes that costs are not excessive and that the recommendation to the client is not unsuitable. Brokers are regulated by FINRA (Financial Industry Regulatory Authority) and state regulators.
If you have questions as to which type of company you are utilizing, just ask your advisor or financial representative for clarification. In either case, both types of companies are constantly regulated to ensure they are doing the best for their clients.
Strategize and Secure
Every game has a strategy that has to be executed in order to win; the same goes for securing your financial future. Without a strategy or plan, the outlook on executing looks dim. We’ve all heard “save more, spend less and invest!” Sometimes knowing how to do it can be the hard part. There are things that I can help you with to turn your strategy into security, and some that you can do for yourself:
Read. Challenge yourself to read two books this year on saving and investing. Choose books that are by reputable authors that have a proven record of success. Knowledge is priceless!
Understand “Risk” and “Reward.” Many factors go into consideration including emotions, your age, and personal tolerance to risk. When you understand this concept, you will be in a better position to handle changes in your investment portfolio (and maybe your life).
Increase your Retirement Contributions. If you can select to automatically increase each year, there’s one thing you don’t have to think about each year!
There is something that feels good about being generous by gifting towards others during the holidays, but sometimes that can turn into a “holiday recovery.” According to a recent survey by Magnify Money, Americans (with existing debt) on average added $986 of new debt this holiday season. The survey also reported that on average it will take more than 5 months for this $986 to be paid off. If you’re one that has existing debt and added more debt in order to “gift”, it is now time to make a plan to reduce or eliminate debt this year.
The importance of eliminating and not adding more debt is that it can have long term effects past the holiday season. If you are carrying debt that can’t be easily paid off and you have a job loss, major medical situation, or other emergency, you may need to liquidate assets such as retirement accounts to clear the debt.
If you need assistance in executing a plan to pay off existing debt, start by writing down your plan and telling someone about it. Having accountability to someone increases your chance of success. As a financial advisor, I can assist you with developing a debt reduction plan. In order to save, you have to have your spending under control.
Taking Care of (Your) Business
Regardless of your age, there are topics that need to be addressed (and taken care of) that pertain to your future. Many times people think these have to do with aging parents, but all ages can benefit from taking care of these items:
Wills. A Will determines the future of money and your property, but affects children and pets too. A Will directive will state who you would want to raise your children if something happens to you, or who should care for your pets. In the case of property that isn’t paid off, such as a home or car, a Will can direct who oversees returning or liquidating the asset(s) to the lender. Expert to Consult? An Attorney.
Authorized User or Signer on Your Accounts. Adding someone else to your account will help ensure that bills are paid if something happens to you. This person can be named as a user and or signer and will need to be on bank and investment account documents in order to access your accounts. Expert to Consult? A Banker at your bank and your Financial Advisor.
Power of Attorney. Giving someone else who you trust the Power of Attorney over your financial affairs in case you are unable to handle them ensures you will be taken care of, and your assets handled as you wish. The Power of Attorney right does not start until you are deemed unable to handle your affairs, generally through a medical or physical condition. Expert to Consult? An Attorney.
Medical Directive. If something happens to you, a medical directive and a living Will can outline your wishes for life-sustaining measures to be or not to be taken. Part of this should be a Health Proxy, which appoints another party to make health related decisions if you’re unable to. If you do not have these documents in place, it is up to the medical community and state laws to determine how you will be cared for. Expert to Consult? An Attorney that specializes in this topic in your state of residence.