Op-ed: Buyers must know precisely what it’s to be an escrow advisor

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Almost anyone can hang up a clapboard and simply refer to themselves as a financial advisor.

Of course, terminology in the financial services industry can be very confusing to investors. There are consultants, brokers, broker-dealers, certified financial planners, licensed financial analysts, and certified investment management analysts, investment advisors, and asset managers to name a few.

Making that call and choosing what type of advisor you need or want to manage your finances is a big decision. And it really is a “buyers watch out” situation when a person seeks an advisor, said Kevin Keller, CEO of the CFP Board, who sets and enforces the standards of certified financial planners.

However, the most important factor in choosing a financial advisor is that they be a trustee. A trustee is required by law to act in the best interests of a client. It is also important to understand that many advisors are not trustees.

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The financial advisor, who is a trustee, owes a fiduciary duty to the client, which means that he must act in the client’s best interests. When there is a conflict of interest, the advisor must fully and fairly disclose all material facts so that the client can make an informed decision about whether to proceed with a transaction.

Here are the five basic principles of the fiduciary standard:

  1. The well-being of the customer comes first.
  2. Act with caution; that is, with the skill, care, diligence, and good judgment of a professional.
  3. Do not mislead customers; Conspicuous, complete and fair disclosure of all important facts.
  4. Avoid Conflicts of Interest.
  5. Disclosure and fair handling of unavoidable conflicts in favor of the customer.

Those who do not operate under the fiduciary standard are only subject to a suitability standard, which means their advice must be suitable for you. While these terms appear to be relatively similar, there is a reason that trust and suitability standards are on opposite ends of the dictionary.

A fiduciary financial advisor must put your interests before his own, and these individuals are typically independent financial planners who pay only fees. The standard of eligibility applies most commonly to broker-dealers and commission advisors.

Suitability means that the investments recommended by the Investment Adviser only correspond to the objectives and profile of the client and do not necessarily have to correspond to them. These advisors can continue to recommend proprietary products even if they are inferior to alternative investment options.

The suitability standard also enables these finance professionals to sell overpriced investment products for which they tend to earn higher commissions, rather than leading their clients to lower-cost investment options. The consultant only has to prove that the product is not unsuitable for his customers and that the product does not have to be in the best interests of the customer.

“If, in my view, you claim to be providing financial advice to a client, you have an obligation to act on behalf of the client,” said Avani Ramnani, CFP and director of financial planning and investment management at Francis Financial. “If you don’t protect your client’s rights, don’t call yourself an advisor or a financial planner.”

It seems like a breeze to choose a financial advisor to act as a trustee.

However, there is significant misinformation that leads many people to a false sense of security.

Personal Capital funded a research study that found that nearly half of Americans mistakenly believe that all advisors are required by law to always act in the best interests of their clients. Not only is this wrong, but it can hurt the millions of savers and investors who inadvertently expose themselves to biased and potentially dangerous advice from advisors who can do the best for themselves at the expense of their clients.

It is important to speak a customer’s language and provide them with the relevant facts and reasons for a particular recommendation.

Avani Ramnani

Director of Financial Planning and Investment Management at Francis Financial

Another aspect of a trustee’s duty is to act in good faith and provide all relevant facts to clients. Part of that duty is educating your clientele.

The financial industry is known to use terms that can be difficult and complicated to understand. A financial advisor must explain these concepts and their recommendations as failure to follow them can lead to misunderstandings, misinterpretations, or misguided advice.

“As a financial advisor, speaking a client’s language and informing them of the relevant facts and reasons for a particular referral is important,” said Ramnani. “I compare it to teaching someone to play a musical instrument.

“Musical terms make little sense to a beginner,” she added. “A qualified teacher, however, breaks down all obscure terms so that the new learner can understand, practice and improve their performance.”

A trustee must disclose conflicts of interest and all fees for services should be clearly explained, transparent and detailed through specific written disclosure. When a consulting firm adheres to the highest standards for its clients, managing and fully disclosing a conflict of interest becomes a straightforward and easy process.

The need to disclose potential conflicts of interest isn’t that strict on non-trustees, and unfortunately, some bad apples fall from this non-trustee tree. Regulators have overwhelmed advisors, charged undisclosed fees, falsified investment performance, switched accounts and lied about qualifications.

How does an investor protect himself?

Regulators need to continue to step up their efforts to tackle fraudulent advisers who fail to protect clients’ rights. Clearer lines need to be drawn so that individuals can better distinguish between trustees who provide real financial advice and advisors who are only interested in product sales.

In the meantime, the consumer has the arduous task of digging through the thousands of financial advisors and figuring out who a trustee is and can offer them independent, conflict-free financial planning and investment advice.

Investors must ask a financial advisor if they are acting as a trustee at all times. Also, ask your advisors to sign an “Fiduciary Vow” prepared by the Fiduciary Standards Committee to ensure that they comply with the five most important fiduciary principles.

– From Stacy Francis, CFP, President and CEO of Francis Financial

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