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Are Physicians Selecting an Investment Fox to Watch Over Their Nest Eggs?


Why is it important for someone who is seeking an investment adviser to find one who is a fiduciary?

Why is it important for someone who is seeking an investment adviser to find one who is a fiduciary?

Technically, fiduciaries are required to do only what is in the best interest of the people they represent. Fiduciaries must not allow any conflicts of interest to infect their duties towards their clients.

Commonly recognized fiduciaries are physicians and attorneys, who are legally required to put a patient’s or client’s interests first. ALL physicians and attorneys are fiduciaries. Some investment advisers are also fiduciaries, but NOT ALL of them.

Investment advisers who are not fiduciaries can make investment decisions that may be in their own best interests, such as earning them higher commissions or other financial incentives. But those decisions may not be in the best interest of their clients, who might receive a lower return on their investments, suffer higher risk than necessary, or both.

To draw a simple analogy, when renovating your home, selecting the right contractor is the most important decision. You don’t want to choose a contractor who:

● Selects building products which give him a high profit margin, but are of low quality

● Hires less competent subcontractors who kick back to him a portion of their costs

● Cuts corners during construction to get the job done quickly, rather than doing quality work

Financial advisers for physicians who are not fiduciaries could:

● Recommend financial products paying them high commissions, but not necessarily best for you

● Recommend financial products pushed by their company, but again, not necessarily best for you

● Recommend products offering hidden bonuses, but again, not necessarily the best for you

It all comes down to how financial advisers choose to make a living: as brokers selling products or as Registered Investment Advisors (RIAs) selling advice. Here’s the difference:

Brokers choose to affiliate with a financial services company whose goal is to make money by selling products to their clients. They can work directly for a single company, or sell the products of several companies. They are commission-based salespeople.

Registered Investment Advisors are fiduciaries whose goal is to make money by recommending how clients can best achieve their financial goals. Fee-only RIAs have no compensation conflicts of interest, since they do not earn any commissions on the products they recommend. They provide a professional service, like a physician.

Brokers are concerned with moving as many products as possible. The more transactions, the higher their profit. Brokers are often provided incentives to recommend certain products of the company, or products which earn the company (and ultimately the broker) higher commissions, bonuses, or other financial inducements. A clear conflict of interest exists in this arrangement when brokers have the option of recommending two products to the client: Product #1 offers the client a greater return at less risk; Product #2 offers the broker higher commissions. Which one is the broker more likely to recommend to the client?

RIAs on the other hand, earn an annual fee for providing financial guidance to their clients. There is no financial incentive or inducement for RIAs to recommend one product over another. In fact, as a fiduciary, RIAs are required to recommend what is in the best interest of their clients. The only way RIAs can make more money is if their clients’ portfolios increase in size, since their annual fee is usually based on the size of the portfolio. As the clients’ portfolios grow, so does the RIA’s fee.

RIAs are regulated by an agency of the US government, the Securities and Exchange Commission. The SEC has strict rules and regulations governing RIAs, requiring them to do only what is in their clients’ best interests. And who regulates brokers and their companies? The National Association of Security Dealers, more commonly known as NASD, a trade organization made up of brokers and their employers.

So when physicians select an advisor to help take care of the financial nest egg, they should make sure that it isn’t a fox in a fiduciary’s clothing.

To learn more about the importance of utilizing an advisor who is a fiduciary, visit Focus on Fiduciaries run by the National Association of Personal Financial Advisors.

Stay tuned for our next article in this 6-part series: When it comes to long-term financial success, what is more important?

Tom Orecchio, CFA, CFP, CLU, ChFC, AIF, is the President of Modera Wealth Management, an fee-only wealth management services company.

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