Objective information about financial planning, investments, and retirement plans

Why Should I Care if My Financial Advisor is a Fiduciary?


House Financial Services committee members sit...

Much has been written of late about the issue of Financial Advisors as fiduciaries. There are a number of initiatives in Congress. One would force commissioned reps such as stock brokers to adhere to the same standards as Financial Advisors.

I am not an attorney, but let me throw out the following as a working definition of a Fiduciary:

fi•du•ci•ar•yA financial advisor held to a Fiduciary Standard occupies a position of special trust and confidence when working with a client. As a Fiduciary, the financial advisor is required to act with undivided loyalty to the client. This includes disclosure of how the financial advisor is to be compensated and any corresponding conflicts of interest.

This is the definition of Fiduciary used by NAPFA (National Association of Personal Financial Advisors) the largest professional organization of fee-only financial advisors in the United States.

Why should you care if your financial advisor is a fiduciary?

Currently brokers are regulated by FINRA, who requires them to make recommendations that are suitable for their clients. I’ve never come across a good definition of what suitable really means. One definition I found on the website of Clausen Miller a law firm with offices in major U.S. and international cities:

The suitability rule provides that when a financial representative recommends to an investor the purchase, sale or exchange of any security, a financial representative shall have reasonable grounds for believing that the recommendation is suitable for such investor upon the basis of the facts, if any, disclosed by such investor as to his or her other security holdings and as to his or her financial situation and needs.

This really doesn’t specify anything about loyalty to the client, disclosure or anything else. The word reasonable is quite vague. In fact I would contend that many brokers/registered reps may be more concerned with the compensation offered by the sale of a particular financial product than with looking at the client’s overall financial situation and making recommendations to help that client reach their financial goals.

This brings me to the reason that clients should care if their financial advisor is a fiduciary. As a client I would want to know that my financial advisor is taking my best interests to heart, that he or she is making recommendations to me that are in my best interest. As I understand the current rules, brokers, registered reps, insurance and annuity sales people have no such obligation to their clients. Many are sales people trying to place a financial product.

Several years ago Charles Schwab ran an ad depicting a brokerage office pushing the stock of the day and used the phrase “…let’s put lipstick on this pig…” While humorous (and perhaps exaggerated) I fear that it does reflect the mentality of many product pushing sales people calling themselves financial advisors.

The worst part of all of this is that the public doesn’t really understand it all. Many who are regulated by the Suitability rules are competent and concerned with the welfare of their clients. They make recommendations that are in line with the interests of the client. Unfortunately there are others who don’t and are not required to under the vagaries of the Suitability rules.

It is my hope that Congress will enact a Fiduciary Standard for all who call themselves Financial Advisors that is clear to the public and defines the duties of an advisor with regard to putting the client first.

Please feel free to contact me with your financial planning questions.  I am a member of NAPFA who adheres to the organization’s fiduciary standard.

Photo credit:  Wikipedia

Enhanced by Zemanta

Subscribe to Blog via Email

If you enjoyed this article, please enter your email address to receive the latest updates about financial planning, investments, and retirement plans.


  1. Great post, thanks for clarifying to investors.

    Suzanne Hamilton

  2. Thanks for your comment as always Suzanne.

  3. Informative post. Thank you for such a nice and useful post… By the way do you heard about the site http://www.gentlerainaffluentmarketing.com. They are exclusively for Financial and Insurance Advisors…

  4. Great post … the important words to follow in the relationship are "trust" and "undivided loyalty." "Disclosure" is not far behind. There are proposals to pass a "fiduciary" standard that ignores any or all of these.

    When working with your advisor, Do you TRUST them? What is the foundation of that trust? It shouldn't just be a gut feeling but rather backed up by a written agreement. Same goes with UNDIVIDED LOYALTY. Have something in writing that you can fall back on if your gut instinct proves to be wrong.

  5. John,

    Thanks for the comments. I agree with you in the hope that Congress does not pass some sort of watered down Fiduciary Standard that does nothing for the investing public.


  6. We would counter that this perspective brings significant downside both from a marketing/sales and legal POV. It is also being seen by some clients and their attys as a kneejerk sales ploy. We are advising our advisor and provider clients to think long and hard and clearly before using the "F" word.


  7. Elmer,

    Thank you for your comments. I can't comment from a legal perspective, but I think clients what an advisor who puts their interests first. It will be interesting to see what form any legislation in this area might take.


  8. Roger,

    I agree with your thoughts on the legislation. However, Illinois real estate law specifies that IL real estate agents such as myself have a fiduciary relationship with our clients. We owe them confidentiality, disclosure, loyalty, obedience, accountability, skill and care. More than once I have witnessed agents on the other side of a transaction looking out for their interests, not their clients' interests. Ensuring that practitioners uphold their fiduciary duties is a challenge.

    Fran Bailey
    Realtor – Baird & Warner

  9. The full definition of suitability is on the FINRA website. : http://finra.complinet.com/en/display/display_viewall.html?rbid=2403&element;_id=3638&record;_id=4315

    You'll note that hand-in-hand with suitable is fair dealing.

    The oddest part of this debate, as I see it, is that FINRA and the fair dealing rules have serious ongoing enforcement of this supposedly "lower" standard of care. Meanwhile, the Fiduciary standard of care, while being higher is also harder to prove in court — and only Madoff-size cases get prosecuted.

    I think, in addition to a Fiduciary standard of care being the default setting, there needs to be more enforcement.

    Then, in the few cases where a financial representative is acting as a broker, should there be extensive signoff on to whom the broker owes the loyalty. (I can think of several examples of when this may the case — like a broker using best efforts to selling a new security — his/her duty is clearly to the issuing entity. Or an insurance agent who represents the company, in collecting underwriting information. Or, even a selling real estate broker, who's fiduciary duty is to the seller, not to the buyer…)

Speak Your Mind