For this week’s newsletter, I talk about winning a wealth manager award and fiduciary responsibility.
2016 Five Star Wealth Manager
Ryan Hughes was recently named a 2016 Five Star Wealth Manager in San Diego. Ryan is the Founder and Portfolio Manager at Bull Oak Capital, an independent advisory firm that provides financial planning and portfolio management services to successful individuals.
The Five Star award recognizes service professionals who provide quality services to their clients. Five Star Professional partnered with San Diego Magazine to find wealth managers who satisfy 10 objective eligibility and evaluation criteria that are associated with wealth managers who provide quality services to their clients.
The Difference Between a Fiduciary Advisor and the Suitability Advisor
The day I received the nice-looking Five-Star plaque for my office (Dec 29, 2015), the market began it’s most recent precipitous fall. Since then, within 3 short weeks, the S&P 500 fell -9.5%, only to bounce back somewhat to (as I currently write this) be down only -5.3%. With this market volatility as a backdrop, I am often reminded of the level of responsibility my clients entrust in me. To put it bluntly, my clients trust me with their wealth. This is no easy thing for an individual to do and I realize this. My job is to honor that trust by doing my job to the best of my ability and by doing them. There are no shortcuts in life, especially when it comes to wealth management. But I do not believe that all financial advisors approach this level of responsibility in the same manner.
Now, more than ever, investors need to be working with an advisor that places their best interests before their own. Wall Street is fraught with brokers and deal-makers that are not required to live up to the Fiduciary Standard, but only the Suitability Standard. What is the difference?
Suitability Standard: Most financial advisors are brokers that work at household name firms (e.g. Merrill Lynch, Morgan Stanley, Edward Jones, etc.). They are subject to the Suitability Standard. The SEC (Securities Exchange Commission) says that the financial advisor “must have a reasonable basis for believing that the recommendations suitable for you.” This is a lower standard than being a fiduciary.
Fiduciary Standard: Advisors (e.g. Registered Investment Advisors such as Bull Oak Capital), are demanded that they place the client’s interest’s ahead of his or her own.
While the difference may not seem like much at first, the results can be drastic. Here is an example:
Suppose an adviser can either sell a high-commission product or recommend a no-commission fund, both of which are suitable for you. The fiduciary adviser will be required to recommend the no-commission fund, because he or she always must put your interests ahead of their own. But the non-fiduciary adviser could go either way because both products are suitable. Of course, you will probably be worse off if the adviser selects the high-commission product, since the added costs, often in the 3% to 6% range, tend to reduce the product’s total investment returns.
Think about it: You invest $1 million, your adviser makes $60,000 in an instant (based on a 6% commission), and you’re worse off. Yet his or her conduct is just fine under the suitability standard since the investment was suitable for you. (Source: aaii.com)
If protecting your wealth is not within the Suitability Advisor’s best interest, then why do so many High Net-Worth investors work with them? Simple. They don’t know what they don’t know. If the average HNW individual doesn’t know the difference between the two, then there really isn’t any reason to believe that the HNW individual will make the right decision. Most HNW individuals flock to well-known brokerage houses when seeking financial advice, unbeknownst to them the Suitability Standard.
The SEC is considering making the fiduciary standard an industry-wide requirement, including the broker/dealer financial advisors. This proposal has been 5 years in the making and the SEC recently announced that it would unveil the details of this rule in Oct 2016. However, this rule, if adopted, would dramatically change the way Wall Street operates. Additionally, there has been significant backlash since President Obama directed the DOL to adopt the fiduciary standard.
I am not placing any bets that the SEC rule will come out on time. Too many firms depend upon high commission costs and fund fees to simply allow a law like this to be enforced. Given the more stringent stipulations for investment fiduciaries, there is little question that the fiduciary standard better protects individual and institutional investors, than the suitability standard. It only makes sense to work with somebody that will place your own interests before their own.
While the information presented herein is believed to be accurate, Bull Oak Capital LLC (Bull Oak) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Bull Oak is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Bull Oak makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Bull Oak or its employees may have an economic interest in securities mentioned herein.