What is a Fiduciary and Why Does it Matter?

The post today comes from fellow Fee-Only Financial Advisor, Dave Fernandez, an Advisor in Scottsdale, Arizona. He, like myself, is a Fiduciary. If you don’t know what that is, you should. It could be the single most important factor when considering a financial advisor. Or if you already have an advisor, after reading this article you will want to know if they are a Fiduciary. Dave will explain exactly what this means and why it matters.

You may be reading this article if you are looking for a financial advisor but not quite sure which one to choose or what issues to consider before hiring one.  A good starting point is to determine if your potential financial advisor is working under a fiduciary standard and legally bound to act in your best interest, or if he/she is working under a suitability standard, which is considered a lower standard of care. 

Fiduciary standard of care versus suitability standard of care

Fiduciary Financial Advisor

The words “fiduciary” and “suitability” may be new to you, so let me provide you with an overview of each term as it relates to your investments and overall financial well-being.   

In the financial advice industry, the fiduciary standard is considered the highest level of care a financial advisor or financial planner can operate under.  Under the fiduciary standard, your financial advisor has a duty of loyalty and care to you, is required to legally act in your best interest, and must put your financial interests above his or her own.  This is similar to the same legal level of care you would expect from your doctor, lawyer or CPA.  In addition, if there are any conflicts of interest, they must be disclosed in writing, along with any fees or compensation.

The fiduciary standard is aligned with Registered Investment Advisors (RIAs) who are licensed under the SEC or in their state of business.  RIAs are governed under the Investment Advisors Act of 1940. 

In contrast to the fiduciary standard, the suitability standard means a financial advisor can provide advice and financial products that are considered suitable for you based on a basic understanding of your financial situation.  One of the key defining differences in this definition is that “suitable” means there could be better investment options, but what is being recommended to you meets a suitable or reasonable solution.  For example, the financial advisor may have access to investment options that are lower cost, better diversified or pay a smaller commission to the advisor, but the advisor could choose to recommend the investment option that pays him or her a higher commission as long as the investment product was deemed suitable for your financial situation.  I think you can see the potential conflicts of interest that could exist in such a scenario.  Whereas the fiduciary standard requires that a financial advisor eliminate any conflict of interest, or at least disclose any conflict of interest in writing, the suitability standard has no such requirement.

Commonly financial advisors that are aligned with a broker-dealer and practice under the suitability standard are stock brokers, insurance agents or may work at a bank.   They are licensed under a different governing body called FINRA.

How do I determine if my financial advisor is acting under a fiduciary standard or a suitability standard?

1)    The easiest way is to ask them directly.  Will you be acting under a fiduciary standard of care and are you willing to put that in writing?

2)    Are you a Registered Investment Advisor (RIA)?  Can I see your form ADV?  The form ADV is the regulatory document under the SEC or their state of business that provides an overview of their RIA firm, services to be provided, fee structure and discloses any typical conflicts of interest. 

3)    Another option is to ask them what types of securities licenses they hold.  A financial advisor providing advice as a fiduciary is licensed as an RIA under the Series 65 license.  A registered representative selling financial products under a suitability standard is typically licensed under a Series 7 (stock broker’s license) and/or Series 6 (mutual fund and variable annuities) license. 

What about the new fiduciary regulation that was to go in effect on April 1st 2017?

Due to great consumer demand for working with a fiduciary, the Department of Labor created a law that was to go in effect beginning April 1st 2017 that would require all financial advisors working with IRAs or retirement accounts to provide advice under a fiduciary standard.  Many are calling this “fiduciary lite” as it was not quite as stringent as the fiduciary standard that RIAs currently operate under.  However, it was a much needed step in the right direction for the financial services industry.  Unfortunately, the new presidential administration requested a hold on this new law and asked that it be further reviewed before being implemented.  At this point we don’t know if it will be delayed for only a period of time, face changes prior to implementation, or be completely eliminated altogether.

So where can I find a financial advisor or financial planner that operates as a fiduciary?

The good news is there is a great option currently in existence that will allow you to work with a fiduciary based financial advisor - The National Association of Personal Financial Advisors (NAPFA), or www.NAPFA.org.  On their website you can search nationwide for a financial planner that is near you.  In full disclosure, I am also a member of NAPFA.   One of the great things about NAPFA is all financial advisors that are affiliated with this organization proactively chose to act as a fiduciary for their clients.  Not only do they act as fiduciaries, but they are also fee-only and do not sell any commissioned financial products.  For more information on types of financial advisor compensation, please see my article titled “What is the Difference Between Fee-Only and Fee-Based?”

In conclusion, if you want unbiased and transparent financial advice, then consider working with a Registered Investment Advisor that holds themselves out as a fiduciary and is willing to put that in writing.

About The Author

 Dave Fernandez, CFP® is a native of Arizona and has over 20 years of experience in the financial services industry.  He started his financial services career in 1995.  As a NAPFA Registered Financial Advisor, Dave owns a fee only financial planning and wealth management firm, in Scottsdale, Arizona called “Wealth Engineering” http://www.wealth-engineering.com/.

Top Young Minnesota Entrepreneurs - Minnesota Business Magazine

Every year Minnesota Business Magazine comes out with a list of the top young entrepreneurs in Minnesota. And I am honored to say that I am one of them! Even more so I am actually surprised to be listed because after seeing and meeting many of the other young entrepreneurs I realize there is a lot of drive and creativity among the group. So much so that my financial planning practice looks downright boring by comparison. Rest assured, the Minnesota economy is in good hands!

You can check out all the winners here.

Here is a link to the our press release about the event.

Funny but True...Edward Jones Employees Sue Edward Jones because their Funds are too Expensive

The very same funds that they sell to the investing public are not good enough them because they're too expensive.

Edward_Jones_Sues_Itself

In a lawsuit filed August 19th of this year on behalf of the employees of Edward Jones states that the high fees for investment management are costing them millions in retirement savings. The glaring hypocrisy is that the expensive funds highlighted in the lawsuit are the very same ones that they currently sell to their clients. What's good enough for you (the investor) is apparently not good enough for their own portfolios. Oh the irony!

Apparently, this is nothing new in the broker/dealer world. Employees are finally getting frustrated with the junk investments in their 401(k) plans - New Your Life Insurance, American Century Investments, Neuberger Berman, Morgan Stanley, and Franklin Templeton have all been targeted with lawsuits. (see video about broker's versus fiduciaries).

Edward Jones has relationships with all of the fund providers whereby they receive millions in revenue sharing for all the funds they sell to their clients. This is how the funds also ended up in the Edward Jones 401(k) plan.  These providers are often called "Preferred Partners" and provide about 40 of the 50 fund options within the plan. These fund companies include American Funds, Franklin Templeton, Invesco, The Hartford, MFS, Lord Abbett, JPMorgan, and Goldman Sachs. If you have any of these funds in your portfolio it might be time to think about whether or not your advisor is acting in your best interest.

I for one am very happy to hold the same investments as the ones I recommend for my clients. I invest in very low cost, tax-efficient, and highly diversified funds and am never charged a fund load (sales charge paid at the time of purchase). I very much doubt that Edwards Jones would be involved in this lawsuit if they used these type of investments. But then again, they wouldn't have much of a business left if they stopped selling the more expensive mutual funds as that is a large part of how they make their money.

Here is a link to the news release about the lawsuit.

Financial Planning is all about goals, but what are you really trying to get out of life.

Financial Planning is all about goals, but what are you really trying to get out of life.

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Financial Advisors and the Fiduciary Standard

Have you heard of the term "Fiduciary?" If you haven't then it's time learn what it means to you and your money. This articles explores why a fiduciary financial advisor is so important compared to broker/dealers and insurance salesmen. #FiduciaryStandard

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