Who can you trust when investing?

By: Julio Cacho, PhD & Juan Carlos Herrera

When soliciting financial advice from an independent financial advisor, we often trust that we are being told information that is in our best interest. But how do we know this is always the case? We can have confidence knowing that the fiduciary rule exists to protect us from disingenuous activity.

A fiduciary is a person who holds a legal or ethical relationship of trust with another party. The SEC defines the fiduciary rule as a law that demands independent advisors to act in the best interest of their clients while placing the clients’ interest above their own. As such, it is expected that independent financial advisors, who focus on things like investing and retirement, always attempt to ethically find clients the best rates possible with no conflict of interest.  

Unfortunately, not all financial entities feel they have a fiduciary duty to their customers. Many commercial banks, for instance, gain new customers with enticing rates. However, these rates only last for a certain period of time (often one year) before the rates return to normal. The customer is then left to keep track of when the better rates expire. If your money is kept in the bank for many years, the bank will be on the winning side of that deal once the better rates expire.

Energy companies act in a similar manner. Special offer rates for gas and electricity tempt new customers to sign up; however when the offers end, the existing customer is placed on the standard rate, where the energy company earns more revenue from its clients.

The financial entities that oppose the fiduciary rule argue that consumers make their own choices. It should be noted, however, that not all choices are easily identifiable. Consumers can sample manufactured goods and foods to discern what the best option is for them, and can always opt to not purchase a good or food if the item doesn’t meet their needs. It is much harder for consumers to tell the quality or expected price for services such as gas and electricity.

Thankfully, independent registered investment advisors have to follow the fiduciary rule as they have a fiduciary duty to their clients. These advisors are obligated to provide appropriate investment advice and always act in the best interest of their clients.

It is important for investors to make sure that their advisors are fiduciaries working on their behalf and abiding by the law. When selecting a new financial adviser, don’t hesitate to ask the difficult questions or get a second opinion to make sure the advice you receive is truly in your best interest.  

For more please click on The Economist article below.