Is Your Financial Advisor a Fiduciary?

By Adam Oerther, CFP®

After writing my last blog post about lessons to be learned from the Great Recession, I realized I missed the opportunity to shed light on a fascinating trend currently going on in the financial advisory industry—the shift toward fiduciary advice and investment management. This trend gained national attention back in 2016 with the introduction of the Department of Labor’s Fiduciary Rule, which mandated that all financial professionals must act in the best interest of their clients when working with retirement plans or providing retirement planning advice. While the rule was ultimately struck down in March of 2018, the story brought to light the fact that not all financial advisors are required to act in the best interest of their clients, particularly brokers who are paid commissions on the financial products they sell their clients (mutual funds, annuities, etc.).

“What exactly is a fiduciary?”

A fiduciary is a person or legal entity entrusted to manage the assets of another person or entity, and the fiduciary standard is the highest possible legal duty from one party to another, mandating that the fiduciary always put the other party’s interest before their own. One very common example of a fiduciary is the trustee of a trust, who has been appointed to hold and control assets on behalf of a beneficiary or beneficiaries. Other examples include corporate officers, attorneys, and the executor of a person’s estate. However, only some financial advisors are fiduciaries to their clients. This is important, because a fiduciary money manager follows what is known as the “prudent-person rule” (also known as the “prudent man rule”), which restricts the manager to only buying for his or her clients the types of investments a prudent person would buy for his or her own investment portfolio when seeking reasonable income and preservation of capital, and particularly speculative or risky investments must be avoided.

“So, my financial advisor might not be giving me good advice?”

Unfortunately, that could be the case. For advisors who get paid via commissions from product sales, they have an inherent conflict of interest, as their compensation is based on those sales, and they are often being told by upper management to push certain products to clients, which may or may not be appropriate for them. That being said, just because someone is not legally held to the standard of a fiduciary doesn’t automatically disqualify them from providing you good financial advice. There are plenty of financial advisors with good intentions who do their best to provide their clients with excellent financial advice. However, as we at B&C have seen many times in the past, this inherent conflict of interest can lead to an overly-complicated investment portfolio without a clear investment plan to go along with it.

“How can I tell if my financial advisor is a fiduciary?”

Apart from directly asking the advisor if he or she is a fiduciary, one way to tell is by paying attention to the products they are recommending to you. For example, if a mutual fund has high fees and high commissions but has a lower-commission version of the same fund, someone without a fiduciary duty of care might recommend the higher-cost option, since it satisfies the looser suitability standard and would result in a higher commission for the advisor selling it to you. Another way to be sure you’re working for a fiduciary is to work with a registered investment advisor (RIA). RIAs and their representatives are required to act as fiduciaries at all times. Also, working with a Certified Financial PlannerTM ensures you are working with someone who has your best interest in mind, as these highly qualified financial planners are also bound by a fiduciary duty.

“You mentioned a suitability standard. How is that different than a fiduciary?”

Brokers and other financial professionals, who often use the title “financial advisor,” are not fiduciaries, and they are subject to a suitability standard of care, which is less stringent than the fiduciary standard. The suitability standard simply requires an advisor to recommend products that are “appropriate” for the client, based on things like your age and risk tolerance. However, just because a product is appropriate doesn’t mean the product aligns with your overall financial objectives. Think of it like buying a new outfit—suitability means the clothes simply fit you, and fiduciary means the outfit looks good on you as well.

“Is B&C a fiduciary?”

Yes! In fact, our firm was founded over 20 years ago specifically to do away with the commission-based model—we wanted to rid ourselves of inherent conflicts of interest and “sit on the same side of the table” as our clients. We are a fee-only RIA, and it is actually illegal for any of our advisors to earn commissions from selling you any kind of financial product. We also have four Certified Financial PlannersTM on staff to help you plan for your future and reach your financial goals, all while providing a unique investment management experience designed to preserve and grow your assets safely.

 

Adam Oerther

Author

Adam Oerther