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


House Financial Services committee members sit...

The Department of Labor released its final draft of their fiduciary rules mandating that financial advisors place their client’s best interests first when offering advice on their retirement accounts in 2016. Here is a post I wrote just before the release. DOL Fiduciary Rules – What Do They Mean For You?

The rules were slated to be fully implementated on January 1, 2018, but the Trump administration’s opposition to these rules scuttled this. The current state of things in the financial advisory world is mixed, as some brokerage firms had gone partially down the path of implementation.

At the end of the day, however, why should you as an investor care if your financial advisor is a fiduciary? Here are some thoughts on this for those looking for a financial advisor or who are already working with one.

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?

Stock brokers are regulated by FINRA, who required them to make recommendations that are suitable for their clients. I’ve never come across a good definition of what suitable really means. Here is one definition I did find several years ago 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 at best.

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 acting with my best interests at heart, that he or she is making recommendations to me that are in my best interest. In fact, as you receive disclosures telling you that your broker, financial advisor or registered rep is now a fiduciary acting in your best interests a logical question is, “Weren’t you doing this in the past?”

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 did reflect the mentality of many product-pushing sales people calling themselves financial advisors.

Many investors don’t understand

The worst part is that most of the investing public doesn’t really understand all of this. Many financial advisors who are subject to the suitability rules are competent and concerned with the welfare of their clients. They make recommendations that are in line with the best interests of their clients. Unfortunately, there are others who don’t and are not required to under the vagaries of the suitability rules.

While the new fiduciary rules were largely scuttled, the investing public can and should look for advisors who act in their client’s best interests. Pay attention to any and all disclosures that you might receive from your financial advisor. Ask questions and don’t settle for half-baked answers. Ask your advisor outright if they are a fiduciary and if they act in their client’s best interests. Ask about any potential conflicts of interest they may have in rendering advice to you. Ask them about all sources of compensation from their relationship with you. It’s important that as a client you fully understand all of this. There is no one right or wrong answer, ultimately that is for you to decide as a client or prospective client.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Concerned about stock market volatility? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

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  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…)

  10. Nice post. Advisors who are not Fiduciaries are merely required to believe their recommendations are suitable for their clients, after considering their financial needs and objectives.

  11. One way to ensure an advisor always acts in a fiduciary role is to separate financial advice from investment management. For example, an advisor has no incentive to recommend product X if the client manages investments and insurance independently from the “advice-only” advisor’s firm.

    • Roger Wohlner says

      Wilbur thanks for your comment. That can work as long as the client is comfortable in that role. Each client’s needs are a bit different so in my opinion its still important to find an advisor who truly acts in their client’s best interest.

  12. Indeed, most of the investing public is not fully aware of the technicalities. Thanks for clarifying it and providing what questions to ask your financial advisor.

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