Is My Financial Advisor a Fiduciary?
Question – Oh no. I’m back again, which means you are going to be having a full-blown conversation with yourself. Right?
Answer – Well, not a full-blown one. However, I think it is important to talk about a big term in my world that gets thrown around a lot. And maybe clarify things a bit.
Q – Fine. I’ll bite. What is the word?
A – Fiduciary.
Q – Okay. This seems simple enough. I have heard that term before and think I know what it means.
A – Good. This should be a short conversation then. May I ask what you think it means.
Q – I hate it when you ask the questions, but I will humor you. Ummmmm, I think it means you meet certain standards. Well, maybe it means you take a specific approach with clients. Or, it just is you focusing on clients. Yeah, I guess I really am not fully clear on things.
A – Hey, no worries. Even though it is just one word the big, confusing world that is the financial services industry has once again made it more confusing than it needs to be. In simplest terms, being a fiduciary means putting the clients first.
Q -That’s it! Putting a client’s interests first? That is super simple. And why does there have to be a term? I mean, shouldn’t every financial advisor have to put their client’s interests first?
A – Yeah, you would think so. Unfortunately, reality is not quite so clear.
Q – Of course. Give me an example of this.
A – Great question. Let’s say you are working with an advisor who has two reasonable recommendations they can provide. One recommendation just happens to pay them more than the other one. Under standards referred to as “best interest or suitability” the advisor could legally recommend the one that pays him more. Under the fiduciary standard they must recommend the one that pays him less.
Q – That seems a bit questionable. Is it that common?
A – Oh, it is very common. There has been a battle for years between the Federal government and those at large financial institutions about requiring a fiduciary requirement for all financial advisors. I think you can put together financial institutions prefer the standard that allows them to collect more in fees.
Q – Alright, let’s jump to the end here and forget the politics. How do I tell my financial advisor is a fiduciary?
A – Good question. First, you need to verify they are truly a financial advisor.
Q – Ughh. Not this again.
A – Yes, this again. Anyone can call themselves a financial advisor. I’ll make it easy for you. Be sure to check FINRA Broker Check to see if they are truly registered. I would also recommend you dig around their website to see if it just shows language about selling insurance products only. However, websites can be confusing so definitely check the FINRA site.
Q – Alright, I promise to check the FINRA Broker Check site. What else?
A – The easiest way to ensure your advisor is a fiduciary is by confirming they are a Certified Financial Planner (CFP). CFPs are required to be fiduciaries.
Q – Cool. So I just find a CFP and I am good to go, right?
A – As long as they are a full-time fiduciary you are correct.
Q – Oh, come on! What do you mean full-time fiduciary?
A – Hey, I told you my world likes to make things confusing. Let me provide a simple explanation. Say your CFP advisor works with a Broker-Dealer. In this role they are most likely an Investment Advisor Representative (IAR) and also work for the securities firm that is the Broker-Dealer. In these cases they can work both as a fiduciary and also in this best interest/suitability capacity. So, they can put your interests first at times and also put the firm first at other times.
Q – This is so freaking confusing and the complete opposite of simple!
A – You are right.
Q – Seriously, how do I find a CFP that is a full-time fiduciary and will always and only put my interests first?
A – Ask them to put it in writing and be sure this includes documentation of all fees you are being charged and also revenue heading their way. Finding a fee-only advisor is also beneficial.
Q – Okay, seems like extra work on my part but I will take your advice. It sure would be nice if an advisor just could have a designation with fiduciary in the title and that would take care of everything.
A – Yeah, that would be logical but we don’t want to go down that rabbit hole. Unfortunately, there was a proliferation of designations that include the word fiduciary when it looked like this was going to be the standard. Most of these designations are worthless and are used for marketing purposes.
Q – Some days I really hate talking with you. Your world can be the worst.
A – I know. I guess to summarize I would verify the advisor is a CFP, check the FINRA site, see how they are registered, confirm how they are paid, and be sure to get it in writing that clearly states you always come first. That is part of the reason I am one of the few CFPs who operates under a single flat-fee setup. There is no confusion. I am always a fiduciary and 100% of the time.
Q – I’m still annoyed at your world, but appreciate the advice and education. Now, let’s not talk for a bit. Okay?
A – Sounds good. Go enjoy the weather!
I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.