Over the past year, there has been a lot of talk – and just as much confusion – about the Department of Labor’s “Fiduciary Rule”. The proposed rule will legally and ethically require all financial advisors who provide retirement planning advice to meet “best interest” advice standards.

These standards say that advisors must act in the best interest of their clients when providing investment advice. Advisors must do their best to ensure their advice is informed by complete information, which means looking into all potential options for a client. They should also avoid and disclose any conflicts of interest, and always aim to execute trade orders at the lowest price and with the most efficiency.

Because of some delays, the regulation won’t take effect until 2019, but it has sparked conversations among investors about what should be expected from the professionals managing their accounts and dispensing investment advice.

At Wescott, we believe it’s important for our clients and all investors to understand what it means to work with a fiduciary. There are three key questions every investor should ask, whether they are seeking a new advisor or already working with one.

Do you uphold the fiduciary standard?

There is a critical distinction here.  Advisors who are fiduciaries operate in compliance with the fiduciary standard, which means they are bound by the legal and ethical standards of the Fiduciary Rule. Other advisors or brokers will abide by what’s called a “suitable and appropriate” standard, which requires they make recommendations based on what is suitable for a client’s personal situation. A “suitable” recommendation does not necessarily equate to the best recommendation for a client’s portfolio.

Those who practice with a suitability standard are not bound by the same principles as fiduciaries, and they may have conflicts of interest (see below) that compete with providing the very best advice for investors.

Wescott’s Response

Yes, Wescott’s advisors are in legal and ethical compliance with the Fiduciary Rule and always have been. Acting as a fiduciary means putting our clients’ needs ahead of our own, every time. We see it as our duty and responsibility to act in our clients’ best interests.

Do you have any conflicts of interest in serving my needs?

Find out if your advisor or broker receives commissions or other incentives to recommend products or funds to you, and to what extent they engage in this. While there are well-known offenses such as “churning” (making excessive trades within a client’s portfolio to capture the associated fees) there are less-obvious ways for brokers to financially benefit from client portfolios. Ask about operational expenses associated with your funds to understand exactly where your money is going.

In response to the DOL rule, many commission based brokers are moving to a fee-only model and eliminating commissions altogether. Yet fee-only advisers also have moral conflicts to manage. For example, if a client is purchasing a house, they may ask an advisor whether they should take out a mortgage or pull from the funds the advisor manages. Advisors operating under the fiduciary standard are required to present all options, even if this could impact the amount of assets the advisor is managing – and ultimately their fee. If you’re working with a fee-only advisor, find out how they navigate this.

Wescott’s Response

We are morally and legally bound to act in your best interest at all times.

We believe that charging clients on a fee-only basis is the most transparent and commonsense approach, and our fee structure is based on the amount of assets that Wescott manages on your behalf. There are no hidden costs, we do not take commissions and we are not incentivized to promote any investment or insurance product. In fact, we don’t sell insurance; we direct clients to our list of vetted providers.

And when it comes to guiding clients through a financial decision, our advisors lay out all options. We make pro/con lists, run projections and ensure our clients understand the implications of every scenario. That said, it’s also our duty to serve as clients’ advocates – so we make recommendations based on our understanding of their goals, and we are unafraid to raise red flags if a particular choice will compromise their financial well-being.

How will I know if you are acting in my best interest?

Learn how your advisor selects their investment options and how they will report performance back to you. Many firms have a process in place to vet their asset managers, and this should include an analysis of their expense ratios, or how much it costs to operate various funds. Responsible advisors will weigh performance against cost to make sure you’ll get the best return for the lowest fee.

Wescott’s Response

We have a robust Investment Research Group that vets all of the asset managers and funds made available to our clients. This team conducts due diligence on indicators like performance and also analyzes expense ratios to make sure the cost is reasonable and fair for our clients. Our Investment Management Committee must then approve all managers before they can be incorporated into Wescott’s investing model.

Finally, our clients receive monthly reports on their portfolios directly from the custodians managing those investments, in addition to quarterly reports from their Wescott advisor.

Have questions about the DOL Fiduciary Rule or Wescott’s approach? Contact us to speak with an advisor.