What Is a Fiduciary Advisor, and How Do I Know If My Advisor Is One?
“Wait—my financial advisor doesn’t have to act in my best interest?”
To people who don’t have much experience in the financial industry, it’s shocking to learn that a financial advisor might not be legally required to do what’s best for their clients. But, unfortunately, that’s the case for many financial professionals.
In an ideal world, the professional you call for advice would be a fiduciary advisor. It makes sense that someone who is advising you on how to invest and spend your money should have your best interests in mind. But the fiduciary status depends on a variety of factors, such as how the financial planner is registered, who they work for, and where their paycheck comes from.
As someone in the market for a financial advisor, it’s important that you understand what a fiduciary is and how to find an advisor who falls under that classification.
What Makes an Advisor a Fiduciary?
Simply put, a fiduciary advisor is obligated to put their clients’ best interests ahead of their own. That means they should avoid conflicts of interest, make their fees transparent, and give thorough advice.
This fiduciary standard dates back to the Investment Advisers Act of 1940, which mandated that anyone who is paid to give securities investment advice must act in the best interests of the clients. They also have to register with the U.S. Securities and Exchange Commission or a state regulator. However, there are loopholes that make various financial professionals exempt from these requirements.
Usually, fiduciary advisors are “fee-only” advisors, meaning that they don’t accept commissions—they receive compensation from the fees their clients pay. If a conflict of interest arises, a fiduciary advisor must disclose it to you, their client.
The “fee-only” compensation structure is as opposed to a “commissioned” advisor or “fee-based” advisor, both of whom can receive commissions from the sale of financial products, investments, or services that they recommend.
Receiving a commission from the sale of a financial product creates an inherent conflict of interest. This is because that advisor stands a chance of making more money from suggesting that product to you.
By removing the temptation of a commission, the advisor can earn their money much like your attorney or CPA would—via the fees you pay them for the services they provide you. Their interests stay aligned with yours.
The Fiduciary Rule
In the last few years, the fiduciary standard has come into the spotlight in financial circles. The Department of Labor passed a rule in 2016 requiring all retirement advisors to act as fiduciaries for their clients.
However, before that law was set to go into effect in 2017, the newly elected Trump administration put it on hold—and the Obama-era decision was struck down in 2018 by the federal appeals court. This effectively upheld the status quo for brokers, who generally don’t operate under a fiduciary standard.
As U.S. News & World Report states: “The rule … resurfaced in a less restrictive form in 2020. The latest version was approved by President Joe Biden's administration and went into effect on Feb. 16, 2021.”
The upshot is that the rules are still murky, and just because professionals say they are a financial advisor (or financial planner, wealth manager, investment manager, and so on) doesn’t mean they have to act in your best interest 100% of the time.
Now, you may be comfortable working with a non-fiduciary for certain objectives. For example, if you do your own investing and want someone to complete trades for you, then you may decide to work with a non-fiduciary broker.
However, if you want someone to manage your investments or to give you long-term advice on your finances, we recommend you consider a fiduciary advisor. Given the state of the rules, it will fall on you to make sure any financial professional you are considering retaining is a fiduciary.
“How Do I Know If My Advisor Is a Fiduciary?”
The title of “financial advisor” is a wide umbrella encompassing many jobs, including investment management, financial planning, financial coaching, tax management, insurance sales, securities trading, 401(k) administration, wealth management, and retirement planning—just to name a few.
Financial advisors have different regulations and compensation structures based on their specific job descriptions and where they work. Generally, an individual financial advisor will fall into one of three categories:
Investment adviser representatives: These are advisors who work for a Registered Investment Advisor (RIA), which is regulated by the U.S. Securities and Exchange Commission (SEC) or by individual states. Advisors with this classification are fiduciaries and must always act in your best interests.
Registered representatives: These are advisors who work for a broker-dealer regulated by the Financial Industry Regulatory Authority (FINRA). These advisors are generally held to a suitability standard when giving advice, not a fiduciary obligation.
Dual-registered: These are advisors who work for hybrid firms that allow them to act as an Investment Adviser Representative or a Registered Representative as needed. For instance, they may give you fiduciary advice about your retirement plan but receive a commission for an insurance product you purchase.
Only investment advisor representatives who are not dual-registered are full-time fiduciaries.
Usually, the simplest way to find out if your financial advisor is a fiduciary is to ask them. They should be able to give an unequivocal “yes” and be willing to put it in writing. Anything less should be considered a red flag.
When you’re in the market for a financial advisor, make sure to do your research on the type of firm they work for, and ask questions like the following:
Do you have a fiduciary obligation to your clients? The answer should be “yes.”
Is your firm a Registered Investment Advisor or another type of company? An RIA must serve as a fiduciary.
Is your firm independent? This means they are not tied to a larger company and are free to advise you based on your needs rather than a parent company’s dictates.
How are you compensated? You want to ensure that you are the one paying them for the advice they give you.
Do you receive commissions or any other compensation from third parties? Find out what company provides the commissions or other compensation, and under what circumstances.
[If they’re fee-based:] What percentage of compensation do you receive from commissions vs. advice fees? It’s important to understand how this breaks down so you can make an informed decision about their suitability for you.
In what circumstances do you serve as a fiduciary, and in what circumstances do you not? Like the question above, you should know exactly when they are your fiduciary and when they are not.
A fee-only, fiduciary financial advisor is likely to charge you based on the assets they manage for you. Or they may charge a retainer fee or hourly fee depending on the services you need. But in all these instances, you, and not a company, are the one paying them.
“How Else Can I Tell If an Advisor Is a Fiduciary?”
Talk to a potential financial advisor about the certifications they have. Certain credentials are a tip-off that the professional is obligated to serve as your fiduciary. Those include:
CERTIFIED FINANCIAL PLANNER™ (CFP®)
Accredited Investment Fiduciary® (AIF®)
Chartered Financial Consultant® (ChFC®)
Certain organizations also require that their members serve as a fiduciary. For example, if a firm or individual advisor is a member of the National Association of Personal Financial Advisors (NAPFA) or on the FeeOnlyNetwork.com, then they have agreed to serve as fiduciaries.
Conclusion
While there are many different types of financial advisors out there, not all of them are legally required to put your best interests first. Our Roseville- and Folsom-based financial advisory firm believes that the obligation is so important that we were founded as fiduciaries.
When interviewing potential financial advisors, take the time to discuss whether they will serve as fiduciaries to you. If they won’t, they may face conflicts of interest that won’t serve you in the long run.
Schedule a complimentary, 15-minute call with a fee-only, fiduciary financial advisor today to discuss your personal situation.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor serving the greater Sacramento area with an office in Roseville, CA. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.