This article discusses what a fiduciary is, why it’s important, and how to find a fiduciary.
What is a Fiduciary?
A fiduciary is required to put their client’s best interest first.
The term “financial advisor” can be misleading. It implies a level of fiduciary duty. Some may think all financial advisors are required to put their client’s best interest first at all times.
Unfortunately, most financial advisors are not fiduciaries. Many financial advisors can legally provide advice that is not in their clients’ best interest. A financial advisor who is not a fiduciary at all times can put their own interest, or the interest of their company, ahead of what’s best for their client.
For example, high commission investments, such as most annuities and non-traded real estate investments, make more money for the financial advisor and for their company than no commission investments, such as publicly traded stocks and bonds.
Further, high commission investments are often terrible for the client compared to no commission investments. Unfortunately, many advisors recommend these high commission investments because they make more money for themselves by doing so, in spite of the fact that these investments are not good for their clients.
Unfortunately, this is totally legal if the advisor is registered to act as a non-fiduciary.
Why Fiduciary Matters
Fiduciary matters because you’ll receive higher quality advice when working with a fiduciary advisor whose interest is aligned with your own. Incentives matter. Fiduciaries do not get paid hidden commission to sell certain investment products.
The fiduciary advisor and the client transparently discuss all fees up front in advance. The fee is not contingent on how the money is invested. The fiduciary is providing real advice, not selling products. Learning how to find a fiduciary, which we’ll discuss below, may prove critical for your long-term financial security.
Three Types of Financial Advisors:
Advisor #1 – Never Fiduciary – This category of financial advisor is never required to act in their client’s best interest. They sell financial products.
Advisor #2 – Sometimes Fiduciary – This category of financial advisor is not required to act in the client’s best interest at all times. This category of advisor will often market themselves to prospective clients as fiduciaries because they are required to act as a fiduciary under certain circumstances. However, this advisor is also registered to act as a non-fiduciary, which permits them to sell high-commission, unattractive investment products to their clients like the examples we discussed above. This setup is particularly dangerous for consumers because it can be very deceptive and misleading. This category of advisor may claim “fiduciary”, but conveniently leave out the “sometimes”. Unfortunately, the “sometimes” can cost you a lot of money.
Advisor #3 – Always Fiduciary – This category of financial advisor is always required to act in the client’s best interest. They provide real advice. They do not sell products. In terms of investment advice, they’ll often suggest straightforward publicly traded stocks, bonds, and funds. These simple, liquid, no commission investments are what’s best for the client. There are tens of thousands of investment options to choose from, including stock in great US companies such as Apple, Microsoft, Amazon, etc., US Treasury Bonds, and many high-quality, low-cost funds. You are not missing out on anything that you actually need by focusing your investments with a fiduciary on public securities, and you’re protecting yourself from complex, high commission, unattractive investments often sold by non-fiduciaries.
How to Find a Fiduciary:
Step 1 – Go to the website investor.gov. The homepage looks like this (as of 2020):
Step 2 – Type the financial advisor’s name into the “Check Out Your Investment Professional” box. See below for example (as of 2020):
Step 3 – Click on the financial advisor’s name. Depending on how common the name is, you may have to look through the names to properly identify the financial advisor by location and firm. See below for example (as of 2020):
Step 4 – A screen will appear showing if the advisor is a “Registered Investment Advisor”, a “Registered Broker”, or both. See below for example (as of 2020):
“Registered Investment Advisors” are required to act as fiduciaries and put their client’s best interest first at all times. They generally offer simple, public investments like we discussed above.
“Registered Brokers” are not fiduciaries and are not required to put their client’s best interest first. They generally offer more complex, opaque, high-commission investment products like we discussed above.
Within investor.gov, Advisor #1 (the Never Fiduciary advisor) will show up as a “Registered Broker”. They are not fiduciaries. Financial advisors in the “never a fiduciary” category may also be insurance-only advisors. In this case, their name may not appear in the investor.gov database at all because they are not registered to provide investment advice and are neither a “Registered Investment Adviser” or a “Registered Broker”.
Within investor.gov, Advisor #2 (the Sometimes Fiduciary advisor) will show up as both a “Registered Broker” and “Registered Investment Adviser”. Being a “Registered Broker” permits them to act as a non-fiduciary and sell unattractive investments for high commissions as discussed above. However, they'll also appear as a “Registered Investment Adviser”, which is a fiduciary. As mentioned above, Advisor #2 will often market themselves as a fiduciary and omit the fact that they are only a fiduciary “sometimes”. Again, this can be very deceptive and misleading for consumers, and the “sometimes” can cost consumers a lot of money.
Within investor.gov, Advisor #3 (the Always Fiduciary advisor), will show up as a “Registered Investment Adviser” only. They are not also a “Registered Broker”. They’ll often be listed on investor.gov as a “Previously Registered Broker”. This shows that at some point, the fiduciary advisor took real action to drop the capability to act a non-fiduciary "Broker". This action shows they are serious about putting client’s best interest first because there’s effort and generally some financial cost involved for financial advisors to give up the capability to act as non-fiduciary "Broker". Anyone can claim they put their client’s best interest first. Everyone will say this, and it’s essentially meaningless. Actions speak louder than words. By working with a fiduciary advisor who is always a fiduciary advisor, you will receive advice that is in your best interest at all times, period.
Now that we’ve discussed how to find a fiduciary, why would anyone choose to work with Advisor #1 or Advisor #2 discussed above? In reality, an informed consumer probably wouldn’t. Many don’t know about investor.gov and three types of advisors discussed in this article. Obviously, the financial advisors who fit into the Advisor #1 and Advisor #2 categories are in no rush to share this information with their clients.
A fiduciary advisor, an advisor who is required to act as fiduciary and put your best interest first at all times, is held to the highest standard of care. Finding a fiduciary and hiring a fiduciary will reduce the risk that poor financial advice becomes an obstacle towards achieving long-term financial security.
Would you like a 1-on-1 retirement planning consultation? Fill out the “Request Consultation” form, call us at 267-427-5667, or email kyle.rolek@rolekretirement.com