When you go to a financial advisor, you’d assume he—or she—is looking out for your best interests. But not all advisors are required to put your interests before their own.
That’s about to change though, at least for any advisor being compensated for making recommendations to anyone who’s participating in a retirement plan, like a 401(k), or who owns an Individual Retirement Account (or IRA).
A rule announced last year by the Department of Labor, will soon require them to uphold what’s called a “fiduciary” standard, meaning they must put their clients’ best interests first. Brokers and many advisors are now only required to recommend products that are “suitable,” but not necessarily the best product for their client. (The rule is scheduled to take effect on April 10, but President Trump has indicated he wants to review the rule and delay implementation.)
The fiduciary requirement, which will be implemented next year, may not seem like a big deal. But Elliot Weissbluth, CEO of HighTower Advisors—a nine-year-old national financial services company with more than $30 billion in assets under management that has long adhered to the fiduciary standard—says it’s like the difference between getting dietary advice from a butcher or from a registered dietician.
“Brokers are butchers selling products; fiduciaries are dietitians looking after your health,” he says. “The problem is most people think their butcher is a dietitian.”
We talked to Weissbluth about what the new rule means for those seeking financial advice, what investors should ask when they hire an advisor—and the best financial advice he’s gotten.
It’s important because it draws attention to the fact that, unlike doctors and lawyers, many financial advisors are not legally obligated to act in their clients’ best interests (this concept known as the fiduciary standard).
What should investors know about the ruling?
Investors need to fully understand how their financial advisors get paid. For example, Registered Investment Advisors (RIAs) collect fees for the advice they provide, and are held to the fiduciary standard. But the new Department of Labor rule does not eliminate conflicts of interest created when brokers who are not RIAs are incentivized to sell proprietary products that profit their firms. Investors should also recognize that if they do suspect their advisor is in violation of the rules, the onus is on them (the client) to sue the advisor—the Department of Labor does not actively police financial advisors at the individual level.
Do additional steps need to be taken?
We founded HighTower on the premise that financial advisors should always put their clients’ interests first—period. That’s still my vision for the entire industry, whether it can be accomplished by legislation or not.
What should investors ask advisors when they’re seeking financial advice?
They should ask the advisors how they make their money. Are they fee-based or paid on commission? Does the firm, not just the advisor’s compensation, make any money from them in addition to the fee they pay their advisors?
Only 14 percent of millennials surveyed by UBS said they got advice from a traditional financial advisor. Do you think that will change?
I think that millennials have the potential to accelerate some changes that need to be made. The embedded sort of trust and confidence that the Gen Xers inherited is simply not there for millennials. Gen X followed in the footsteps of their parents, using the same banks.
But millennials are technologically dependent in ways that predecessor generations are not. And when they’re told something, they need to verify it. If a broker says something a little glib, and the evidence doesn’t support it, that will further deteriorate and accelerate the crisis of confidence.
So where are people in their 20s and early 30s going to get their advice?
I think they’ll segment the service they get from their technology. They’re comfortable relying on the tool to deliver a particular benefit to them. But they’re going to realize they need a human being in the mix. Life is not neatly packaged like an algorithm.
But they’re not going to overpay. All the tools and technologies will be a catalyst for people to ask: What am I really paying for?
The expectation is that they will pay low fees and get a good result.
What’s the best financial advice you’ve gotten?
One simple piece of advice that’s resonated with me is the idea of living within 70 to 80 percent of what you make. It’s always having the idea that there’s a piece off the top that gets put away for investing and saving. If you live within an artificially and rigidly reduced amount of what you make, you’re never struggling to save.
A lot of people, unfortunately, live right up to—and beyond—what they’re making.
A lot of people see debt as a way of life.
I also think the credit card industry has done a good job of getting to students early. We need to educate people earlier on. It’s very easy to get into debt early.
And hard to get out. Is there any advice you wish you’d gotten earlier?
I was lucky. I had amazing parents, who are Renaissance people. They thought everyone should learn languages and arts and sciences and math. Reading for reading’s sake was valuable. Learning for learning’s sake was valuable.
Now I have three kids, and I realize how profound their impact was on me and how much your parents can affect your life.
What’s the best advice you got from your parents?
My mom would say the darkest hour is just before dawn. I believe that. There are a lot of times in life when things look really grim. And you just have to have faith when it gets bad that the light will come out. Things will get better. I think there’s a benefit to just having an optimistic hopefulness. It’s a pretty simple piece of philosophy that has guided me.
My parents also said: Be true to yourself. And that makes very difficult decisions very easy. With some of the most challenging decisions, if you just ask yourself, what is the right thing to do? The answer is often very easy to find. But that doesn’t mean it’s easy to execute.
What advice would you give your kids?
You need to find a career you have passion about. You can’t just do a career for the money. The sooner you find out what you’re passionate about, the sooner you can make a living. Financial rewards follow passion and success.
And if you don’t know?
Embrace the uncertainty, and go be curious about a lot of things. People will tell you it’s a waste of your time, but it’s not. Be curious and keep looking until you find the the thing you’re passionate about. You will know it when you find it.