To be or not to be… Fiduciary - Important or table stakes when searching for or working with a Financial Planner?
The financial services landscape can be confusing for those looking to hire or evaluate their financial advisor or advisory firm. In an industry where there is no uniform definition for what a financial advisor actually does, it can be vexing to analyze the differences between financial professionals, let alone the firms they represent. To compound matters, the industry uses confusing jargon that intentionally increases the complexity, making it difficult for the consumer to easily make heads or tails of things. Judging from the many articles and advertisements, hiring a fiduciary should simplify the process. So, what does that term even mean, and is it really that simple?
What is a fiduciary?
To boil things down – A fiduciary is someone legally and ethically bound to act in the best interest of their clients, rather than in their own interests, i.e., free of conflicts. It is crucial to remember that not every financial advisor is held to a fiduciary standard. You read that correctly: not every financial advisor is legally required to put a client’s interest ahead of their own. Certain advisors are only required to adhere to the “suitability standard,” which says they need to recommend investments that are suitable for a client.
What does it mean for an advisor to be truly conflict free?
It can be difficult for an investor to ascertain if an advisor is a true fiduciary. Advisors are required by law to disclose any conflicts of interest. As with all loose definitions, perspective is everything! One person’s conflict may be another’s opportunity.
Consider an advisor that claims to work for an “independent firm” with an official-sounding name such as XYZ Financial Group. On the surface, the advisor and firm may seem conflict-free but are fiduciaries in name only. The website might include reassuring language like, “We are proud to be an independent financial services firm as it allows us the freedom to provide our clients with objective advice.” However, it is impossible for an investor to know what is happening behind the scenes. In reality, XYZ Financial Group is owned by another type of company called a broker-dealer, and that broker-dealer is in turn owned by a life insurance company. This entity structure is filled with conflicts of interest, where clients might be recommended proprietary products made by (you guessed it)—the insurance company. The insurance company might offer higher commission, luxurious vacations, or other incentives to prioritize their product to clients. The same applies to investments; an investor may notice that XYZ Financial recommends proprietary mutual funds or investment strategies, which might lead to fee charges for advice and additional fees for using the firm’s investment products –known as “double dipping.” This creates an inherent conflict of interest and could result in questionable advice.
How can I tell if my advisor is a fiduciary?
- Ask them point-blank! Any advisor should be able to clearly answer this question in a direct way.
- Look for the right designation: Designations often require that a financial advisor adhere to a fiduciary standard. The most highly regarded designation in the financial services industry is the Certified Financial Planner™. CFP® professionals must follow a strict code of ethics and professional conduct that requires them to always act as a fiduciary when providing advice.
- Check for Registered Investment Advisor (RIA)s: RIAs are registered with the state in which they operate or with the SEC at the federal level. An advisor working for an RIA has a fiduciary duty when working with clients.
- Read the fine print!When examining a firm’s website, scroll down all the way to the bottom. You might see a statement that reads “Securities offered through ‘ABC Company.’” An internet search can reveal if ‘ABC Company’ has affiliations with investment or insurance companies.
Is it really that important that your advisor be a fiduciary?
Navigating the financial services landscape can be overwhelming, particularly when determining whether your advisor is genuinely acting in your best interest. As you sift through jargon and claims, remember that understanding the concept of fiduciary duty is crucial. While some advisors may market themselves as fiduciaries, it is essential to dig deeper and ensure that they truly uphold this standard. At the end of the day, selecting an advisor who puts your interests first is not just a smart choice—it is the foundation of ethical financial planning.
The Department of Labor finalized the Retirement Security Rule (view here) to help protect investors who rely on the advice of professionals for how to invest their savings.
RiversEdge Advisors, LLC is a registered investment adviser. Registration does not imply a certain level of skill or training. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.