Sound Smarter Than All Your Friends

You'll want to read this for two reasons: 1) it directly impacts you and 2) understanding it will make you sound smarter than all your friends. 

You've probably heard about the new Department of Labor Fiduciary Rule.  You also probably have no idea what it is, what it does, or why you should care. 

It partially went into effect last Friday, so now it matters.  Over the next two weeks, I'll give you you two bite-size explanations.

First, there are two types of financial advisors:

  1. Independent (like The Financial Zen Group)
  2. Big brokerage/insurance (like Wells Fargo, Merrill Lynch, Northwestern Mutual)

The difference is not just aesthetic.  Each one is regulated by a different government organization (SEC vs. FINRA). 

As a result, they also follow two different sets of legal standards:

  1. Independent - fiduciary standard
  2. Big brokerage/insurance - suitability standard

A fiduciary is someone with a legal requirement to put your interests above their own. 

So the fiduciary standard is easy to understand.  It means I am legally required to make recommendations in your best interest without regard to my own. 

The suitability standard isn't that complicated either.  It means a financial advisor is required to sell you a SUITABLE investment.  

In other words, the financial advisor can't sell grandma glasses she doesn't need.  But if she needs them, he CAN sell her the glasses that pay him the biggest commission even if he knows they're not the best. 

A fiduciary legally can't do that. 

That's the set up.  Next week we'll get into how that all changed (partially) last Friday.