Is My Financial Advisor a Fiduciary?
One of the murkiest areas in the financial advisory industry is if a financial advisor is a fiduciary. Part of the problem is that the way the word is used within the industry—as a noun—is not even correctly defined in the dictionary.
Merriam Webster defines the noun fiduciary as “one that holds a fiduciary relation or acts in a fiduciary capacity.”
As an adjective, fiduciary means:
“of, relating to, or involving a confidence or trust: such as
“a: held or founded in trust or confidence”
This vague definition says nothing of registering with the SEC which is important because only investment advisors who are registered with the SEC or state regulators are obligated to act in a fiduciary capacity.
So, let’s dig a little deeper to understand this word as it is used in the investment advisor sense.
There are many categories of financial “advisors.” Just as the term “doctor” refers to anyone trained in medicine, there are subcategories of doctors who deal with specific things.
The umbrella term of “financial advisor” can encompass:
- Investment advisors
- Financial planners
- Wealth Advisors
- And others
Within these categories, there are further subcategories. For example, a financial planner could more specifically be a Certified Financial Planner or CFA. CFAs must pass a board exam, have a certain amount of financial planning experience, and are held to extremely strict ethical standards.
In the same vein, a fiduciary is a subcategory of an investment advisor. But before we look at what that means, we need to know the two standards under which financial advisors can operate.
Two Standards of Care
There are two standards used for financial advisory services:
- The Suitability Standard
- The Fiduciary Standard
What is the Suitability standard?
Under the Suitability Standard, advisors are only required to advise clients in accordance with their personal situation. There is no legal obligation to disclose conflicts of interest under the Suitability Standard.
Brokers operate under the Suitability Standard. There might be a conflict of interest because they earn commissions on the sales they make. Brokers are under obligation, first, to the broker-dealer firms they work for and only second to the client they are serving.
The suitability standard is set by the Financial Industry Regulatory Authority (FINRA).
What is the Fiduciary standard?
The Fiduciary Standard is a far more rigorous and strict standard. Under this standard, advisors are obligated by law to work entirely in the client’s best interests. By holding a position of trust, they are obligated to make only those choices that do the most good for their clients. As a result, advisors working under the Fiduciary Standard are only allowed to offer fee-based services and cannot earn commissions on any services they offer or recommendations they make.
The Fiduciary Standard is regulated by the SEC.
Although one would expect all financial advisors to act in a client’s best interests and to follow the fiduciary standard, this is not actually a requirement by law. The only financial advisors who are obligated by law to do this are Registered Financial Advisors or RIAs.
Registered Financial Advisors have registered with the SEC or their state authorities and are thereafter bound by the Fiduciary Standard. An RIA can be an individual, although they are most commonly firms or partnerships.
An Investment Advisor Representative (IAR) is a person who works for an RIA.
The fiduciary standard is pretty specific. Some of the essential elements of acting under the fiduciary standard include:
- Fiduciaries must always place their clients’ interests above their own.
- Fiduciaries must provide “undivided loyalty” to their clients. (source)
- Fiduciaries are forbidden from buying securities for their own accounts before buying them for their clients.
- Fiduciaries must achieve “best execution” for their clients, meaning that “the clients’ total cost or proceeds in each transaction is the most favorable under the circumstances.” (source)
- Investment advice must be complete and accurate and the fiduciary must have exhausted all necessary means to ensure it was so.
- All conflicts of interest or potential conflicts of interest must be entirely disclosed.
Some of the places to find fee-only and/or fiduciaries are:
- NAPFA (The National Association of Personal Financial Advisors)—database of fee-only, fiduciary advisors.
- ACP (Alliance of Comprehensive Planners)—search for fee-only financial advisors
- Garrett Planning Network—fee-only advisors
There are certain questions you should ask your (potential) financial advisor. Once you have received the answer, you should also then verify it yourself.
Some key questions to ask are:
- Are you a fiduciary?
- Are you fee-based only?
- Do you earn any commissions from sales or recommendations?
- Would you have any conflicts of interest or potential conflicts of interest if you managed my account?
- How often will you meet with me?
- Do you work alone or do you collaborate with other professionals?
- What types of clients do you normally work with? Do you specialize in any particular type of client?
- Have you ever been disciplined by the SEC or any other regulatory body? (This is easily verified by using the SEC search tool.)
The first thing to do is contact the fiduciary’s senior and make a formal complaint in writing. If no action is taken, or the action taken is not satisfactory, you should consider hiring an effective investment attorney to look into your case. MDF Law accepts cases against financial advisors on contingency, which means that we will not earn a fee unless we are successful on our client’s behalf.
Process for Suing Your Financial Advisor
Contact us if You Lost Money Investing
Understanding whether your financial advisor is a fiduciary may be confusing and complex. If you have any questions, or if you lost money investing with a financial advisor, please contact our attorneys for a free and confidential consultation.