Financial Advisors and the Fiduciary Standard

Is your Financial Advisor's advice in your best interest? Or his own?

There are a variety of people in the financial services industry who provide financial advice. There are stock brokers who give you advice on which stocks to purchase, there are insurance agents who provide advice on which insurance to buy, there are bankers who give advice on savings, loans, and other bank products. Then there are Registered Investments Advisors or RIAs which is how I operate and how my company operates. All these people are subject to different licensing and different regulators which means they have different sets of rules they have to operate by. Only those who are set-up as a Registered Investment Advisor have something called the fiduciary duty, also called the fiduciary standard. Being a fiduciary means that, by law, I have to work in your best interests. This is very different from the rules of brokers who have a “suitability standard” and insurance agents who have to work in “utmost good faith.” These other standards do not require these people to work in your best interest. In fact, they work in their own best interest and that of the company they work for. 

Image by Carl Richards of Behavior Gap

Image by Carl Richards of Behavior Gap

Watch out for Conflicts of Interest

The suitability standard that brokers are held to can create a conflicts of interest between the broker and the client. Arguably, one of the biggest conflicts is with fees. Under a fiduciary standard a financial advisor would not be able to sell or recommend a mutual fund on the sole basis that it would provide him with a larger fee or commission. This is not the case under the suitability standard because as long as the investment is “suitable” for the client it can be sold to the client even if there are better alternatives. I see this all the time in my practice. Client’s come to me with investments or other financial products that are two or three times more expensive than they need to be. This difference in standards also incentivizes brokers to push their own company’s products over other products that may be better and at a lower cost. 

How do you know if your Financial Advisor is a Broker or a Fiduciary?

Well you can just ask. But I would also recommend watching this video. After watching it I think you will be able to know for yourself without even asking. 

The Times are a-Changin’

The industry appears to see where the demand is shifting. As more and more people realize the value of a fiduciary, advisors are changing to the RIA model. In fact, over the last ten years the number of RIAs has increased by 8% annually over the past ten years according to a study by the Bank Insurance Market Research Group published by Investment News. This is while the number of wire-houses (brokerage houses), insurance advisors, and bank advisors have all declined. Professionals are following the demand of the consumer and switching or starting business as an RIA.

So if you are working with an “advisor” who is a broker, banker, or insurance agent you need to ask yourself the question. Why would you work with someone who is not legally bound to provide you advice that is not in your best interest? Instead, you can just as easily (and most likely less expensively) work with an advisor who is required, by law, to give you advice and recommendations that are in your best interest. The decision is an easy one.

Here are some Questions to ask your Financial Advisor

  • Do you act under the fiduciary standard? Will you put that in writing?
  • Are you a registered investment advisor? Can I have a copy of your ADV brochure? RIAs are required to give out a copy of their ADV brochure on demand.
  • Are you registered with either the SEC or the state you operate in? Fiduciary RIA’s have to be registered with either the SEC or their State Regulatory Agency. Brokers are regulated by FINRA.
  • What is the total cost of working with you? Not just your fees but all the fees I will have to pay? Brokers and non-fiduciary advisors are notorious for having hidden fees and other costs that you are charged for financial products and investments.