• Bernhardt Wealth Management

The Value of Good Advice—and How to Tell if You’re Getting It

The economic and market turmoil during the past year, most of it caused by the pandemic, has brought into sharp focus for many investors the vital importance of dependable, professional advice about investments and financial planning. Especially when emotions are high, having an experienced wealth manager who is ethically and professionally committed to providing counsel that places the client’s best interest ahead of everything else can be a crucial shelter in the storm.

But much hangs on the interpretation of the phrase, “the client’s best interest.” It may surprise some readers to learn that not all financial professionals share an identical understanding or definition of what constitutes the client’s best interest. Even among those who work directly with clients’ investments in the financial markets—those who handle stocks, bonds, mutual funds, and other listed securities—can differ in their approach to working in the client’s best interest.

Registered investment advisers (RIAs), a designation that typically includes those with credentials such as Certified Financial Planner (CFP®), Chartered Financial Analyst (CFA®), Certified Private Wealth Advisor (CPWA®), or Accredited Investment Fiduciary (AIF®), are regulated directly by the Securities and Exchange Commission (SEC) under the Registered Investment Advisers Act of 1940. As such, these professionals are required to apply the fiduciary standard in their dealings with clients; they must apply what the Cornell Law Dictionary terms “the highest standard of care,” acting always in the client’s best interest, even if that is contrary to the adviser’s own interests. Among other things, this means that a fiduciary adviser will:

  • Act with undivided loyalty and utmost good faith

  • Provide full and fair disclosure of all material facts, defined as those which "a reasonable investor would consider to be important"

  • Not mislead clients

  • Avoid conflicts of interest (such as when the advisor profits more if a client uses one investment instead of another or trades frequently) and disclose any potential conflicts of interest in advance and in writing

  • Not use a client's assets for the advisor's own benefit or the benefit of other clients

  • Most often, fiduciary advisors are paid by a fee that is based on the value of the assets they are managing for the client. Thus, as the client prospers, so does the fiduciary advisor—and if the client’s value goes down, so does the fee payable to the advisor. Such types of advisors and planners are often referred to as “fee-only” advisors or financial planners.

Other financial professionals are subject to a different type of oversight, however, and may operate according to a different standard. Broker-dealers, insurance agents, and others who may provide financial advice in addition to selling products are allowed to operate according to a “suitability standard,” which means that they may legally make a recommendation to a client as long as they believe the recommendation is “suitable” for the client’s needs. Often, these individuals are compensated by commissions paid for the sale of products. Rather than regulation by the SEC, these professionals are regulated by the Financial Industry Regulatory Authority (FINRA), a private corporation recognized by the government as a self-regulatory entity for the industry.

In June 2019, the SEC enacted its Regulation Best Interest (“Reg BI”) in an attempt to address the imbalance between the expectations for fiduciary advisors as compared with those under FINRA regulation. While Reg BI bans the use of product-specific sales contests and similar practices that could lead to pushing a product as “suitable” primarily because of the benefit it generates for the salesperson, it did little to guarantee that consumers working with non-fiduciary advisors are getting real advice, rather than a sales pitch. For example, a recent survey by the North American Securities Administrators Association (NASAA) found that in early 2020, broker-dealers were still utilizing certain types of sales contests or quota-based incentives and were more likely to offer complex, high-commission products than fiduciary advisors. In other words, according to the report, “investors seeking the highest standard of care will need to continue exercising caution in taking any securities professional title at face value, and may avoid confusion by simply asking their investment professionals whether or not they are receiving a fiduciary standard of care.”

At Bernhardt Wealth Management, the fiduciary standard of care is the bedrock of our business. We are committed to offering advice based on a single criterion: our client’s best interest. If you’d like to learn more about how we leverage award-winning financial research and years of experience to benefit our clients, please contact us. And to learn more about how we work with clients to deliver a fiduciary standard of care, click here.

Buen Camino!

21 views0 comments