We have all sat down with an “advisor” and wondered if their advice was trustworthy. We know they have the knowledge but do they have our best interests at heart? So we make no decision and choose not to do anything.
Trust is the key to any relationship. It is hard to build the trust to put your life savings with someone in a simple 1-hour conversation. The Fiduciary standard is a great head start, and you should avoid working with anyone that is not a fiduciary.
So, what is a fiduciary?
When talking about financial advisors, a fiduciary is legally required to always act in your best interest. As I said, it doesn’t create trust but gives a good headstart. It’s good knowing someone is putting your interest ahead of theirs. Fiduciaries even allow the law to back this pledge up.
This raises a question; are advisors not required to put your best interest first? Sadly, yes. Most financial advisors are not required to put your interest first. They are even allowed to make recommendations based on the commissions they will make.
For most of the financial services industry’s history, stockbrokers have functioned as a go-between for investment companies and ordinary people. These brokers get paid by the investment company. It may be a commission for a stock, bond sale, or “load” for a mutual fund. Loads are a fancy way of charging you to pay a commission to your broker.
In today’s world, most advisors are brokers. The last number I saw had around 95% of all financial advisors registered as brokers. All wirehouse advisors, think MorganStanly and Merrill Lynch, are brokers. Also, most independent financial advisors function as brokers through Broker-Dealers (BD).
A dead giveaway you are working with a broker is the phrase “Registered Representative of…” In my previous role, I was a Registered Representative of Cetera Advisor Networks. That phrase was on my business card, e-mail, and every mail I sent.
What Does This Mean?
First, it does not mean that brokers are bad. Often they are good people trying to help. It also does not mean broker-dealers are bad. Both brokers and broker-deals serve a useful function in my industry. There are some people for who a broker may be the best option.
It means you need to do some research before just taking their advice.
In reality, something many brokers do not know; they also have a fiduciary responsibility. They are fiduciarily bound to act in their broker-dealer’s best interest. This does not mean they are actively looking to con you. Most businesses realize the best thing they can do for themselves is to do what is best for you; it means they do not have to do what is best for you.
In recent years many broker-dealers have created fee-based investment programs. Fee-based investment programs are designed to eliminate the conflict of interest and offer you a fiduciary relationship with a broker. This is called “Dual Registration.” The financial advisor is registered as a broker and an Investment Advisor Representative (IAR).
Don’t worry. In the end, I will give you a list of questions to ask a prospective advisor.
Dually registered advisors can function as fiduciaries at times, and at other times, as brokers. Since they can change roles anytime, you need to be careful.
It depends on what advice they are giving at the time. When advising you on your fee-based accounts, they are fiduciaries. When they are advising you on other accounts, they are a broker.
They can and sometimes do charge a fee and earn a commission.
In 2016 I decided to leave the Broker-Dealer world and open Family Life Financial Planning. We are a Fee-Only firm. Fee-only means we never earn a commission. We do not receive any compensation from any financial product. 100% of a Fee-Only firm’s revenue comes from our clients.
I believe this is the best relationship for you. It limits the conflict of interest when someone other than the client pays a broker. You never have to worry that we recommend an investment because it pays us more than a competitor’s.
Also, Fee-Only advisors are always fiduciaries. No matter the question you ask, we are required to act in your best interest. So if you ask about life insurance, even though I do not sell it, I am required to give you the best advice for you.
So, Who Do You Want to Work With?
You should always choose to work with a fee-only fiduciary financial advisor. It may seem more expensive, but frequently, that is because you see the fees instead of paying a hidden commission.
I would love to work with you. If you would like to look for other fee-only advisors in your area, www.feeonlynetwork.com is a great resource.
What Questions Should I ask?
To help you sort all this information out, here is a list of yes or no questions:
- Do you always act as a fiduciary?
- If yes, do you put that in writing? Here is my fiduciary commitment.
- Do you ever receive a commission?
- Are you registered with a Broker-Dealer?
- Are you an insurance agent?
Working with someone you can trust is extremely important. Finding a fiduciary is the first step to finding someone you know you can trust.