What You Need to Know Before Choosing a Financial Adviser (or Buying Organic Food)

The long-awaited DOL Conflict of Interest rule has generated a lot of conversation around the concept of “fiduciary.”

The word “fiduciary” comes from the Latin fiducia, or “trust.” It refers to a legally binding obligation to serve the best interest of another ahead of one’s own.

In medicine, it requires doctors to act in the best interests of their patients. In law, it requires attorneys to act in the best interest of their clients.

“Fiduciary” is a label that indicates to consumers that what they’re buying is good for them.

Similarly, the organic movement began as a grassroots alternative to mass-produced and highly processed food, but eventually evolved into an industry that is required to adhere to standards that are intended to keep consumers safe.

These standards did not come from the industry itself, however. As demand for organic food rose, regulators stepped in to establish rules governing the use of the label “organic.”

The resulting standards reflect the lobbying of the food industry: USDA rules state that if 95 percent of a product is made up of organic ingredients, it can be called organic. And, if it's 70 percent, the label can read “made with organic ingredients.”

Because of these USDA rules, when you buy “organic,” there could still be inorganic substances mixed in to improve yield or preserve shelf life, color, and appearance. Despite these elements, the label will still say “organic.”

Why It Matters

Many investors assume that their financial advisors act in their best interests and provide “pure and healthy” advice, just as consumers assume that “organic” food will actually be organic. Unfortunately, until recently, retirement advisors and brokers were only required to provide advice that was “suitable” for clients.

It was only in 2016 that the Department of Labor introduced a rule requiring “more retirement investment advisers to put their client's best interest first, by expanding the types of retirement advice covered by fiduciary protections.”

Unfortunately, in order to get the new rule passed, the DOL made concessions to the financial industry, which voiced concerns about the negative impact it would have on their ability to generate profits.

These compromises resulted in a version of “fiduciary” that falls short of its true meaning — not unlike the labeling standards for “organic” products.

One of the most perverse concessions that the large financial firms forced into the new DOL rule allows advisors and brokers to continue the practice of recommending proprietary investment products to their clients. Their claim was that not offering the firm’s own products deprived the client of what was in their best interest.

What You Need to Know

A traditional fiduciary does not sell or manufacture proprietary products, and they will not pressure you into buying them or using them. When you are selecting a financial advisor, be aware of this.

Those that are not pushing their products at you are will likely be more interested in serving in your best interest as a true fiduciary.

This is a simple way to know the difference between a financial advisor that will genuinely help you and one that intends to make a quick buck. Much like the labels “organic” and “made with organic ingredients”, this may initially appear to be a small difference, but it is one that could mean that the service you want is not the one that you are being provided with.

For more information, this quick animated video provides an everyday analogy that can more easily explain this issue, using the example of the toothpaste aisle at your local drug store.

The Bottom Line

Today, if you want truly organic food, and you are prepared to pay the premium, you have to do your own research to make sure “organic” is really “organic”. The same applies if you want a financial advisor who is a true fiduciary.

Remember: caveat emptor. Or, as we know it in English: let the buyer beware.

This article was previously published on inc.com and was originally published by Elliott Weissbluth on LinkedIn as “Pure and Organic…Sort of”