Why Your Financial Advisor Should Be A Fiduciary

 

What if you decided to interview a financial advisor for hire and they said this: I want to help you achieve your financial goals, but I don’t want to be legally required to place your interests above mine because that would be too cumbersome for me to implement and my compensation may be diminished. There may be conflicts of interest that arise from time to time, but I will not disclose them to you. In addition, I don’t want to assume the additional liability that comes with a fiduciary standard. But, I will do my best to help you.

Uhhhmmmmm, ok… We don’t always say what we feel, do we? Unfortunately, financial advisors and their employing brokerage firms would have a tough time convincing folks to do business with them if they adopted a proper fiduciary standard. I didn’t come up with the words above, but I had a nice conversation with a new colleague who did. We chatted about his financial advisory practice and how they avoid potential conflicts of interest with their clients. Here are the important takeaways from my conversation:

1. Only a small percentage of financial advisors are true fiduciaries 100% of the time. Even most Certified Financial Planner (CFP) practitioners, who we are lead to believe are held to a higher standard, aren’t necessarily fiduciaries. In our opinion, only investment advisor representatives of Fee-Only Registered Investment Advisors (RIAs) are true fiduciaries.

2. Consumers can’t articulate how their advisors are compensated. Some advisors earn their living 100% on commissions (think Leonardo DiCaprio in The Wolf of Wall Street), others are compensated solely by fees for advice (Fee-Only), while the majority of advisors want the best of both worlds (for them of course). The trend these days is for advisors to have dual registrations; one as a broker and the other as an advisor. This allows them to charge a percentage of investment assets (such as 1.25%) AND sell you products like insurance, annuities, home loans, as well as earn commissions on investment trades. The conflict with earning commissions is an advisor may recommend a product that pays more via a sales charge versus an alternative that costs the client less such as a no-load mutual fund.

3. Even though its a legal obligation for our firms to act as fiduciaries 100% of the time, we wouldn’t need a law forcing us to do so if one didn’t exist. If all advisors behaved this way, the financial services field would resemble something closer to the medical field (Hippocratic Oath to Patients). Until that happens, most financial advisors will continue to operate within the status quo; as salespeople.

Here’s the short list on how you can tell if your financial advisor isn’t a true fiduciary:

If they recommend you invest versus paying down debt without explaining the expected return on the investment and fail to disclose that the recommendation presents a conflict of interest.

If they recommend you execute a rollover without defining the merits of leaving the 401k where it is.

If they recommend cash value life insurance over term insurance without explaining the pros and cons of each.

If they sell you an annuity without any living benefit guarantees in your IRA.

If they recommend you take the lump sum pension option and invest it versus taking monthly guaranteed income.

If they sell you a deferred annuity the moment your existing annuity is free of surrender penalties.

If your annual reviews are structured around switching to shiney new investments instead of discussing progress towards your goals.

If they recommend mutual funds with sales loads.

If they charge you for a financial plan, then sell you insurance products.

 

I have adopted the Fiduciary Oath that The Committee For The Fiduciary Standard has set forth. Here are the tenets I have always abided by since I started my own advisory practice:

 

– I will always put your best interests first.

– I will act with prudence; that is, with the skill, care, diligence, and good judgement of a professional.

– I will not mislead you, and I will provide conspicuous, full and fair disclosure of all important facts.

– I will avoid conflicts of interest.

– I will fully disclose and fairly manage, in your favor, any unavoidable conflicts.

 

Thank you for reading my post. If any of what I mentioned stirred you up, join the club… I’d love to hear your stories and if you have questions or comments, please reach out to me.