Fiduciary, Fiduciary, Fiduciary

By Lt. Col. Shane Ostrom, USAF (Ret)

Fiduciary. It’s the term of the season in the financial industry.

Technically, it defines the standard of service in which a financial professional works with clients. Fiduciaries work in the “client’s best interest” and not in their own interest. You may be surprised to learn that a fiduciary is not the default standard of practice.

Most financial professionals work under the “suitability” standard. Meaning they only have to provide their clients a suitable product. The suitable standard allows professionals to serve their own interest over the client’s as long as the client’s needs are met.

Imagine if all salespeople worked under the suitable standard. Auto salesperson, “I know you have your eyes set on the XL Model with the soft ride but trust me you can get by with the harder riding DL Model.” Of course, a financial professional will never pitch a suitable product as settling for something less but suitable by definition is less if contrasted against your best interest.

The dilemma; working with a fiduciary does not always get you the best solution. Conversely, a suitable product may be in your best interest.

A 70ish-year old called recently describing a financial objective and how a fiduciary adviser pitched a life insurance product as the answer. Could the insurance work? Maybe. Should it be the primary option? Probably not. The product was not specifically designed to do what the client wanted although it could be finagled to work. Plus the client did not need the life insurance which was the primary purpose of the product. Oh, it was expensive and generated a nice commission.

There may be a number of reasons why a fiduciary might suggest this option besides the commission but they probably aren’t good reasons. Virtually every financial objective has multiple solutions. The option pitched above might have been a good 3rd, 4th or 5thoption—definitely not the first in my opinion. You have to evaluate which is the best. Unfortunately, working with a financial professional under the fiduciary standard is not always the sure answer.

Question is; which option is the best? Generally, the simplest most cost efficient option that is specifically designed to meet your objective is best. How do you know? That’s the tough part of being a consumer in the financial world. The client above could not adequately explain the product or cost. Not a positive sign.

Admittedly, I do not know the above client’s full story and I’ve limited the lesson to a specific example. My suggestion…focus like a laser on the objective, keep it simple, keep the cost down. Fiduciary or not, be your own best adviser.