THE BLOG
01/20/2015 04:45 pm ET Updated Dec 06, 2017

What Wall Street Does Not Want You to Know About Financial Fiduciaries

I bet you did not know the financial services industry has two ethical standards. One benefits Wall Street and one benefits you.

The Wall Street Standard

Wall Street prefers a low standard that is called suitability. That is, stockbrokers are supposed to make suitable recommendations that are based on their knowledge of your goals, risk tolerance, and concerns. This sounds good, but it is a vague standard that is difficult to enforce because it varies by investor.
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A low standard that is difficult to enforce is perfect for a financial services industry that is notorious for abusing investors to maximize revenue and income.

Headline after headline has documented the billion dollar fines that Wall Street's biggest firms have paid when they are caught cheating investors. This is the tip of a very big iceberg.

The Investor Standard

There is a higher, investor-friendly, fiduciary standard that requires financial advisers to do what is best for you. Your interests must come first. The advisers' need to produce revenue and income is second to your need to achieve your financial goals. There would be no billion-dollar fines if Wall Street willingly adhered to this core business principle.

You might think Wall Street would embrace this standard. After all, company TV advertisements say their clients' interests always come first. But, reality says that is a huge lie. Big Wall Street firms spend millions of dollars per year fighting fiduciary standards for the hundreds of thousands of stockbrokers who sell its investment products.

Who are the Fiduciary Advisers?

There are three ways to identify real fiduciary advisers.

  1. Licensing and registration. Non-fiduciaries have securities licenses (Series 6 or 7) that permit them to sell investment products for commission. Fiduciaries are Registered Investment Advisers (firms) or Investment Adviser Representatives (professionals). These registrations permit them to provide financial advice and ongoing services. They are not limited to selling investment products for commission.
  2. Real financial fiduciaries are compensated with fees and not commissions. The most common fee is asset-based. That is, a fee that is a percentage of your assets. For example, you have 500,000 of assets and the fee is 1%. Your annual, asset-based fee is 5,000. There are also hourly and fixed fees that may be charged for adviser knowledge, advice, and services.
  3. These professionals should acknowledge their fiduciary status when they provide financial advice and services for fees. This acknowledgement appears in the service agreements you sign when you select them as your adviser. Watch-out for language that says they are not acting in a fiduciary capacity when they provide advice and services for fees.

Why Does Wall Street Fight Higher Standards?

Higher standards mean increased liability. How does Wall Street knowingly sell bad products that generate a lot of revenue if your interests have to come first? It can still sell bad advice and bad products, but its liability for these nefarious business practices will increase exponentially.

What About You?

You should know this issue exists. You should only select acknowledged financial fiduciaries who have the specialized expertise to help you plan your future and invest your assets.

This is the safer choice for all investors. But, you have to know this choice exists.

About the Author: Jack Waymire worked in the financial services industry for 28 years. For 21 years he was the president and chief investment officer of a registered investment advisory firm. He left the industry in 2003 when his book, Who's Watching Your Money?, was published by Wiley & Sons. In 2004 he launched an investor education website, www.PaladinRegistry.com, that was based on the principles in his book. A Registry of vetted, rated financial advisors was added to the website in late 2004. Jack is a columnist for Worth magazine, a frequent blogger on major financial sites, and is widely quoted in the media including the Wall Street Journal, Forbes, BusinessWeek, Bloomberg, and Kiplinger. Follow Jack on Twitter @PaladinRegistry or email Jack@PaladinRegistry.com.