Financial advisor vs fiduciary

Financial Advisor vs Fiduciary

Navigating the minefield of potential financial advisors can be a daunting task, particularly if (like many people), the jargon and terminology used by the industry is somewhat foreign to you.  One of the problems is that the term “financial advisor” can be used by anybody and doesn’t mean anything.  Many financial advisors are bank salesman or affiliated with chain broker-dealers, and their job is to sell you a specific product.  In contrast, a “fiduciary” or registered investment advisor is often not affiliated with a broker, and receives nothing by putting you into specific funds.  In other words, they are on the “same side” as you.

Fiduciary Definition

The concept of a “fiduciary” can be applied to a lot of situations, as it generally means a person who acts on behalf of another person to manage assets. Essentially, a fiduciary is a person or organization that owes to another the duties of good faith and trust.  They can be board members, the trustee of a trust or estate, or even an attorney to a client.

If your investment advisor is a Registered Investment Advisor (Series 65 registration), they share a fiduciary responsibility to their client to only act in their best interest when choosing investments.  Generally, that means charging a small flat percentage fee annually.  As the value of your assets go up, their fee goes up.  In contrast, broker-dealers, who are often compensated by commission, only have to fulfill what’s called a “suitability obligation”, which means making recommendations that are somewhat consistent with the best interests of their client. Instead of having to place the clients’ interests above their own, the suitability standard only details that the broker-dealer has to reasonably believe the recommendations made are somewhat suitable for the clients financial needs, outlook, and risk assessment.

As you can imagine, this means that when you see a “financial advisor” at a bank or broker-dealer chain, they have an incentive to place your money in funds that benefit them the most, not you.  In the summer of 2018, things got even more complicated, as the Trump administration has moved to remove the fiduciary standard from all organizations that handle client money.  See here for more details.

To address confusion over the broker vs investment advisor distinction in the financial industry, the SEC is likely to propose restrictions on how broker-dealers describe their roles to clients. The SEC’s goal is to prevent clients from mistaking broker-dealers for registered investment advisers, but the end result is that the minefield of picking someone to handle your money just became more difficult.  Make sure to ask if they are registered investment advisor!