What it really means to be a fiduciary financial advisor

Lately, I’ve been seeing an uptick in advertisements with advisor/actors touting how you much you can trust them because they’re a fiduciary financial advisor. This means (or at least is supposed to mean) the advisor is legally obligated to put your interests first, even over and above the commission he/she earns from selling you financial products that may or may not align with your financial and family goals.

Registered Investment Advisory (RIA) firms and their advisors are regulated by the U.S. Securities and Exchange Commission (SEC) and have a legal and ethical obligation to act in your best interests while investing and managing your assets. It gets tricky when even those reputable financial advisors are also registered with a broker-dealer who makes transactions on your behalf—and collect commissions in the process.

man holding a compass pointing due north
Photo by Jamie Street on Unsplash

Broker-dealers and their agents are regulated by FINRA and are not always fiduciaries. They are held to a lower standard known as a “suitability standard.” The suitability standard only requires the broker-dealer (and agents) to reasonably believe their recommendations/products are suitable for the client. In a dispute, being legally obligated is quite different than simply “believing.”

For example, a broker-dealer agent can say, “This financial product looks like it should be ok for Client X, and I reasonably believe it would be, so I can sell it to them and collect my commission.”

By comparison, a fiduciary advisor is held to the higher ethical and legal standard as put forward by the SEC.  “Does this product align with the specifically identified goals of Client X. If yes, I can recommend this product. If no, I am legally and ethically obligated not to recommend it because it is not in my client’s best interests.”

If you ever wonder how to determine if a financial advisor has a relationship with a broker-dealer, it’s generally easy to find on their website. Typically, on the very bottom of the home page you’ll find a paragraph that discloses their relationships. Often the language will read something like “securities and advisory services offered through {broker-dealer name}, or “products and services offered by …” You won’t see this language on a fee-only fiduciary financial advisor’s website because there is no commission generating third-party relationship.

Take the time to check out the websites of advisors you’re interested in interviewing. Then be prepared to ask them questions about their compensation model and if they are affiliated with a broker-dealer. Even if they say they are a fiduciary financial advsior, get it in writing as they may be regulated under the lower “suitability standard” because of their broker-dealer relationship.

You may think you’re working with someone legally obligated to put your interests first and end up with someone who just needs to “believe” he’s doing his best for you. There’s a difference, and it’s good to know it.

As seen in the Racine Journal Times | October 10, 2021 https://bit.ly/3iPRymn

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