Straight Talk about Best Interest
Dr Bob Explains Series on Financial Topics
As a consumer of investment advice, you probably know that some advisors are required to give advice in the best interest of clients. Others are not. This does not imply that advisors who are not so required do not put client interests above their own. After all, legions of advisors at brokerage firms, including household names, are not yet legally required to put client interests first. Yet they have served clients for generations and continue to earn their trust and confidence every single day. Nonetheless, it is worth noting that there are advisors who are legally obligated to put clients’ best interests first.
In this piece I reflect on the notion of “best interest.” I do this not from the perspective of a lawyer, regulator, or industry advocate. Instead I do this from the perspective of a financial practitioner who is obligated to put clients’ best interests first.
Let's explore the words, “best interest.” Something is in your interest if it confers an advantage, or enhances your position or place. So, for example, eating broccoli is in your interest because of its rich phytonutrients, vitamins, minerals, and fiber. Eating broccoli improves your health and so is in your interest. (Of course, even as good as broccoli is nutritionally, I am not recommending a meal that consists100% of broccoli or that it is a good for everyone regardless of her or his health or medical condition.) Something that is in your best interest has to be in contrast to the alternatives. In other words, something that is in your best interest is superior to all other options available to you.
This standard of best interest is a high one. All else equal, it is good for clients that advisors embrace and/or are held to such a standard.
Who Knows? Who Determines?
Who knows what’s in your best interest? You should. Who can better understand you and what is good for you than you? (In this context I obviously don’t include children, whose cognitive development may not be where they have such self-understanding.)
There are instances in which others are in a position to determine what is in our best interest. Examples abound. We can consider the use of seatbelts when driving. Laws require that we wear a seatbelt whether or not we ourselves believe that doing so is in our interest. We have collectively determined through such laws that it is in everyone’s self-interest because if anyone doesn’t wear one, that opting out can begin to undermine the interests of others.
In most instances, you are the best determinant of what is in your interest. We financial advisors then have to work closely with our clients to determine what is not only in their interest but in their best interest. This kind of understanding is built on a relationship forged through time, effort, and trust. As advisors we seek to listen carefully and ask questions about things said and unsaid. Because the financial advisor is more expert about solutions and processes that relate to finances, she has the ability to determine and/or recommend what is in the best interest of her clients.
Care and Best Interest
Considering that finances are a pathway into a person's entire life--whether his health and wellness, relationships and friendships, housing, spirituality--advisors often aspire to at least a basic understanding of these and other domains in clients’ lives. We strive to a holistic and integrated picture of clients’ lives. As a result, taking care, feeling responsibility, and engendering trust are appropriate ways for us advisors to conduct our business.
Still, to determine what is in the best interest of a client can be challenging. For example, I often wrestle with alternative solutions for a client's goals and constraints because part of financial and investment planning is about making assumptions of the future. Not only can clients’ circumstances, goals, and constraints change, so does the world around us, including markets, tax laws, technology, to name just three possibilities. Consequently, there’s a very dynamic process of give and take, and evaluating and re-evaluating what is in a client’s best interest.
I also wrestle with integrating the interest of one person with those of that person's immediate family. The interests of one person often do not coincide with those of another, even when those persons are married to one another. As a result, I seek to know both well, including adult children often. Then I can be confident that I am making choices and recommendations that are in the best interest of my clients.
From the Heart
Investment industry regulators and representatives continue to debate how to ensure that financial advisors work in their clients’ best interest. Laws and regulations matter. Ultimately however it is the advisor’s heart—her moral sensibility and professional ethics—that determines the extent to which she serves her clients in their best interest.
Disclosure: This commentary is furnished for the use of Glen Eagle Advisors and its clients. It does not constitute the provision of investment advice to any person. It is not prepared with respect to the specific objectives, financial situation or particular needs of any specific person. Investors reading this commentary should consult with their Glen Eagle Advisors representative regarding the appropriateness of investing in any securities or adapting any investment strategies discussed or recommended in this commentary. The Chartered Financial Analyst (CFA) designation is conferred by the CFA Institute.