Is your Financial Advisor a Fiduciary? Why You Need to Find Out.

is your financial advisor a fiduciary pasadena ca

Is your financial advisor a fiduciary?  This is a critical question that every investor needs to answer.  Why?

On March 15th, 2018, the Court of Appeals vacated the Department of Labor Fiduciary Rule.  While this may not sound particularly meaningful to the average person, it should.  If you’ve got money in a retirement plan, it could likely impact you.  In 2016, a rule was passed that would require financial advisors who provide certain services to retirement savers to act as fiduciaries.  “Fiduciary” is a legal term.  If your financial advisor is a fiduciary, he or she is legally responsible to put your interests before theirs at all times.  You’d think that would be a given, but it’s not. For some types of financial advisors, it’s perfectly legal for them to put their interests in front of yours. With this recent legal blow to the new rule, consumers need to make sure they are fully informed about who is helping them with their investments. In other words, they need to find out if their financial advisor is a fiduciary.

 

Understanding the Fiduciary Role

Fiduciary is not a term most of us hear every day, so more explanation is in order.  It’s easiest to illustrate the fiduciary role with an analogy.  Let’s say you are concerned about your blood pressure so you want to see a doctor.  Would you rather see a doctor who is independent or one that works for Acme Drug Company?

The independent doctor would probably give you some lifestyle recommendations to cut back on the martinis and fried foods and take up yoga before trying anything else.  But what would the drug-company employed doctor most likely prescribe?  Of course, a prescription of the company’s drug.

Why should you expect anything different?  Because that person works for a product company, they are really a salesperson, not a true doctor.  And they get paid by selling you their products.

Fortunately with doctors, you don’t have to worry about that.  Doctors have a fiduciary requirement to put your interests ahead of theirs.

Not so with financial advisors.  Although hundreds of thousands of them use the title ‘financial advisor’, not all are true advisors.

Some, namely Registered Investment Advisors and Investment Advisor Representatives, are held to the fiduciary standard.  However, others (Broker-Dealers and Registered Representatives) are simply product salespeople.  And because they are salespeople and not advisors, they are not legally required to put your interests first.  Instead, they are required to simply recommend something “suitable” to you.  Even if it costs you more and pays them a higher commission.

Every day, unsuspecting investors put their trust in these non-fiduciary ‘advisors’ who don’t legally have to put their interests first.  And instead of true advice, they get product recommendations that may or may not be good advice.

The Department of Labor fiduciary rule was on course to change that, at least in regard to retirement accounts.  But with the recent ruling, you can’t count on that law to help you in your dealings with advisors.

 

The Danger of the Brand Name

You may be wondering where you find these financial advisors who are really product salespeople.  Usually they are employees of the large name brand firms that sell mutual funds, insurance and other financial products.  While their advertising communicates concepts like care and trust, their business model is set up to serve their shareholders, not their clients.

Why is this so important?  There are many reasons.  In fact, here’s 17 billion:

A White House Council of Economic Advisers (CEA) report states that “conflicted advice” on investments is estimated to cost Americans $17 billion per year.

 

The High Cost of Conflicted Advice

Conflicts of interest are unfortunately all too common on Wall Street.  Even though someone’s business card may say ‘advisor’, if they are not a fiduciary, they don’t have to give you advice that puts your interests first.

While you may still may end up with a solution that fits, part of your money goes to pay commissions. Over time, even tiny percentages can compound into large numbers.

Unfortunately, paying high commissions and fees can mean the difference between a great retirement and one filled with financial stress.

So ideally, you want to avoid it altogether.

 

How to Avoid Conflicted Advice

Conflicted advice is perfectly legal if you are an advisor who is subject to ‘suitability regulations’.  These are the product salespeople who are paid on commission.

But there’s another type of advisor, and this one is subject to very different regulations.  This advisor is held to a much higher ethical standard.  Legally, they must put your interests first at all times.  These firms are ‘registered investment advisors’ and their advisors are called ‘investment advisor representatives’.

Usually these are the local, independent firms.  You probably don’t know their names since they don’t have expensive advertising budgets.   But since they are independent, they work for you, not for their corporate parent and shareholders.

 

Your Financial Advisor:  a Fiduciary, or Not?

Finding out who is a fiduciary and who is not can be difficult, since there are many creative titles and names out there.  Even worse, some fiduciaries may be “dual registered” so they potentially can also act as salespersons part of the time.  If you’re working with an advisor and they are a fiduciary, it’s likely they list that prominently on their website, so you can start there.

But if not, fortunately, there’s an easy solution.  Simply ask your advisor if they will sign a Fiduciary Oath promising to put your interests ahead of theirs in all circumstances.   The beauty of the Oath is that if the person won’t sign it, you’ll know right away you’re likely dealing with a product salesperson.

Now, obviously there are both types of advisors out there.    While the fiduciary standard usually provides most benefits to investors who are looking for a full-service solution, there are times when the suitability standard might be a better choice.  Maybe you know what you want and you’ve determined it’s cheaper to just pay a commission than fees.

But the vital ingredient here is education and choice—you need to know what you’re buying so you can make an informed decision.  And it’s particularly important to know if the ‘advice’ you’re getting is real advice or simply a sales pitch.  Don’t make an expensive mistake that may have you contributing to that $17 billion per year.  Instead, get educated so you know exactly who you are dealing with.

 

For more tips on hiring and working with a financial advisor, download our free eBook.

 

John Odell, CFP® is CEO of Arroyo Investment Group, LLC, a fee-only financial planning and investment management firm based in Pasadena, California. As a GIPS®-compliant firm, we bring institutional quality, high performance investment management and comprehensive financial planning to individuals and families.  Together with Capital Research + Consulting, our sister firm, we collectively manage over $4 billion of assets for individuals and retirement plans.  Visit us at https://arroyoinvestmentgroup.com/ .