The Labor Department’s Fiduciary Rule would have required that all advice from advisors (related to retirement savings and investments) be solely “in the best interest” of their clients. For an advisor to meet that requirement, the advisor would have had to act as a “fiduciary” when advising clients. This requirement was supposed to go into effect during 2017, but it was put on hold by an executive order from President Trump for review and/or repeal.
As a result, it is now in your best interest for you to know the choices available when looking for an advisor, so you can determine whether your advisor will be working with your “best interest” in mind as a fiduciary is required to do.
A fiduciary is, at all times, required to take actions and provide advice that is in your best interest. You would think that all financial advisors would also always have to do this, but most financial professionals, who call themselves “advisors” are regulated under laws that do not hold them to this standard when providing advice to their clients.
Instead, most advisors are held to a lower standard that simply requires that their advice or actions be “suitable” for you rather than what is best for you. Too often, this results in advice being given and actions being taken that puts the advisor’s interest before that of his or her clients’ interests. Many times, this happens when advisors are permitted to recommend investments that pay advisor commissions and/or other incentives.
To Avoid This Situation, Know The Differences Between The Two Advisor Types:
· Registered Investment Advisors (RIAs): All RIAs are regulated by the Securities Exchange Commission and state securities regulators. They are required by existing laws to act as fiduciaries when providing advice and investment management services to their clients. To minimize conflicts-of-interest, they are compensated solely by fees from their clients. If this is the case, they are also permitted to signify themselves as “Investment Counsel” to their clients.
Advisors, who are designated “Investment Counsel” advisors will never sell you investments (such as mutual funds, annuities, and other products) that pay them sales commissions. Look for this designation when interviewing advisors. It usually can be found on the advisor’s business card or will be associated with the advisory firm’s name.
(Important to Know) Most RIAs do not meet the (“fee-only”) compensation requirement to be able to provide “investment counsel” to clients. Registered Investment Advisors are often “dually registered”, which allows them to serve as both a brokerage representative and a registered investment advisor representative at the same time. This arrangement creates a conflict-of-interest.
It often occurs when an advisor works as a “fiduciary” when preparing a financial plan, but next as a broker representative when recommending investments to implement the plan. So, it is important to ask whether the advisor will be meeting the requirements for being a fiduciary in all actions and at all times when any advice (whether it be financial and/or investment) is being provided to you.
· Broker Registered Representatives: They are regulated only by the Financial Industry Regulatory Authority. They are permitted to recommend investment products that pay themselves commissions and/or other incentives.
This practice is not permitted under fiduciary rules. While those products may very well meet the standard of being “suitable”, it does not meet the higher “best interest” fiduciary standard when other lower cost conflict-free alternatives exist. That does not mean that there necessarily will be less valuable advice in all cases. But, it creates the opportunity for it to happen.
So why are some people willing to get advice from these advisors? This choice is often made when there is a lack of awareness of the availability and difference between fiduciary and non-fiduciary advisors. Sometimes, it is more economical to work with this type of advisor when more limited advice is needed. Commission compensation arrangements can often enable these advisors to offer a lower minimum fee to be retained.
Other Considerations:
Before retaining an advisor to help you with financial planning and/or the management of your investments, check whether the advisor’s professional experience and credential show extensive experience and knowledge. Look for existing professional graduate level education such as the Master’s Degree in Financial Services (MSFS) and certifications such as: Certified Financial Analyst (CFA), Certified Financial Planner (CFP), Chartered Financial Consultant (ChFC), Certified Investment Management Analyst (CIMA), and Accredited Investment Management Consultant (AIMC).
Be cautious in working with advisors who say that they are fiduciaries simply because they have obtained a single designation, such as the Registered Fiduciary Designation (RF). A relatively small number of advisors have earned this relatively new designation, and most do receive commission sales compensation. Even though an advisor may claim to be a fiduciary does not guarantee that it is always the case.
The Key Question and Conclusion:
Ask a potential advisor whether any of their business compensation over the past years has come from anywhere other than fees from clients. Only engage the services of advisors that have no potential other interests than yours in mind. Since some advisors may falsely claim to be acting as a fiduciary, take the necessary time to ascertain whether the advisor will practice in a way that will provide a truly fiduciary relationship. Doing this will help you to avoid working with an advisor that does not meet the highest standard when giving advice. When an advisor will restrict their advice to only what is in your “best interest” rather than what could be “suitable” for you, you have found one who really is a fiduciary who will be willing to give you conflict free advice.
Greg Tinaglia
Last Updated: 04/07/2017