April 18, 2022
Q: What is a fiduciary and why is that important?
A: Over the past few years, more and more prospective clients have asked us if we are a “fiduciary.” The answer to this question is yes, but when this question came in, it made us pause and was a good reminder that we toss terms around in our profession as if “everyone” knows what we are talking about. Use of jargon is something we try very hard to avoid, but we’ve fallen victim to in this case.
So, what is a fiduciary? The Investment Advisory Association states, “According to the SEC (Securities Exchange Commission) - As fiduciaries, investment advisers are required to act in the best interest of their clients and not place their own interests ahead of their clients.”
Let’s break this down. There are two standards that financial professionals can work under:
Suitable
Fiduciary Duty
The best explanation I’ve read that really explains this was given by Michael Kitces. He stated, “Suitability means selling a suit that fits you. Fiduciary Duty means it actually has to look good on you, too.” We’ve all seen this and joke about it - you know, “that” person in the big chain store that is wearing something that “fits” them, but perhaps they shouldn’t be. Sorry to put that image in your head, but we all have different body styles and clothes can fit, but not always in a complimentary manner. That’s true of financial products too. Not every product is for every person.
Generally speaking, it also comes down to how compensation is earned:
There are three basic ways in which financial professionals can be compensated:
Commission-Based Models: required to follow the suitability standard, but may follow the fiduciary standard in practice
Commission and Fee-Based Models: required to follow the suitability standard, but may follow the fiduciary standard in practice
Fee-Only Model: required to follow the fiduciary standard.
The potential conflict exists with the first two models because the financial professional compensation is based on the products they sell. Whereas, with a fee-only model, the conflict is minimized. That is one of the reasons we wanted to build a set flat fee model at Rooted Planning Group - we didn’t want to charge you a percentage of your assets because we wanted to make sure that our recommendations weren’t tied to our compensation.
Understand, we need folks that get paid based on the products they sell. Any insurance product is a commission based product, it’s just the way it is, and we certainly want to make sure our clients are protected with such products - BUT, the right product.
We believe a fiduciary relationship is similar to a medical General Practitioner's role - Identify and help diagnosis, then be by your side to assist with the care and implementations of the solutions adopted.
Do your friends ask you financial questions?
Pass those questions on to us at AskRPG@rootedpg.com and we will feature them in our future newsletters.