Does Your Advisor use the “F” Word?

Does your financial advisor use the “F” word? And by “F” word I mean Fiduciary. If he doesn’t, he should.

What is a Fiduciary?

A Fiduciary, according to Wikipedia, is someone who has a legal or ethical relationship of confidence or trust regarding the management of money or property between two or more parties…A fiduciary duty is the highest standard of care at either equity or law.

Which Advisors MUST put your interest first?

Certified Financial Planners, NAPFA Registered Financial Advisors, and Registered Investment Advisors are held to a Fiduciary Standard. They must act solely in the best interest of the client, even if that interest is in conflict with their financial interest. They must advise you on the best course of action even if they make less money. Unfortunately, only a small portion of us are Registered Investment Advisors. Even less of us are Certified Financial Planners. And of the million or so financial advisors, about 3,000 qualify for NAPFA Registered Financial Advisors.

Which advisors do not have to put your interest first?

Most financial advisors are “Broker-Dealers” according to the United States Securities and Exchanges Commission (SEC). Therefore, they are held to a lower, suitability standard of diligence on behalf of their clients. In fact, they may even need to act in the best interest of their employer, according to federal law, not yours.

This doesn’t make any sense. All serious professions require their professionals to put your interest first. If doctors, lawyers, and CPAs must put your interest first, why not financial advisors?

According to the National Association of Personal Financial Advisors (NAPFA), a Fiduciary Oath means that:

· The advisor shall always act in good faith and with candor.
· They shall be proactive in the disclosure of any conflicts of interest that may impact the client.
· The advisor shall not accept any referral fees or compensation that is contingent upon the purchase or sale of a financial product.

This is just commons sense. Dodd-Frank Act almost required all financial advisors to use the “F” word. Now that it didn’t pan out, we’re back to plan A. Just ask your advisor if he or she is a Fiduciary.

Why Find a Fiduciary?

If you had $1 million in your IRA would you invest it in an annuity? What if you knew there was a 7.5% ($75,000) commission for that single transaction, attached to a 7-year waiting period to avoid surrender fees (ranging from $75,000 to $5,000)? What if you were paying 2.5% ($25,000) annual internal expenses that reduced your return every year? Would you still buy the annuity? Or would you buy a Vanguard index portfolio with 0.15% ($1,500) internal expenses and eighty dollars in trading fees? Both might be suitable, but only one is probably in your best interest. For more, read Advisor Fees in Investing.

So if you encounter a financial advisor using the “F” word under the SEC’s fiduciary standard, ask them about the “D” word too, and get full Disclosure of the costs and conflicts of interest associated with their services.