Let’s first start with talking about what a “fiduciary” is and then how to figure out if your advisor is one. If you look up the word “fiduciary” in the dictionary, it’ll say something like, “someone who is held or founded in trust or confidence”. Doesn’t really help, does it? Unfortunately there isn’t a set definition and it is actually something that has been debated about a lot recently in Congress and by the SEC and other financial industry regulators. The way “fiduciary” is used in regards to a financial advice and an advisor, is that it is someone who gives advice or manages assets for the client’s interest first, not their own or their firms.
To get a little more specific about how this relates to financial advisors, let’s look at the 1940 Investment Advisor Act, which is still used to regulate the financial services industry. Besides acting in the client’s best interest, a “fiduciary” must also avoid acting in activity that’s a conflict of interest, and, at the very least, disclose any potential conflict, provide a full disclosure of any advice they offer, and owe the client undivided loyalty and act in good faith. Now, look through all these and think of your advisor, does this person meet all these?
You’re probably asking the same question I hear when I talk about being a fiduciary for the time with people, “what is the best way to know if my advisor is acting as a fiduciary?” It’s actually quite simple, look at how you pay your advisor. To act as a fiduciary, the advisor should be paid the same no matter what investments or advice they give their clients. This way they don’t have a bias to recommend a certain product or investment. It’s sad to say, but most advisors really are salesmen, meaning they only get paid when you buy what they are selling. By now, you’ve probably read or heard about the New York Times Op-Ed by Greg Smith “Why I Am Leaving Goldman Sachs”. Although I don’t agree with everything he writes, Greg sheds light on something that I’ve been frustrated about for quite some time, most large brokerage firms use their advisors to sell products that they make and have a business model that pays their advisors for selling not advising. So, again, take a look at how your advisor is paid, do they mostly make money when you buy what they recommend?
If you don’t know how you pay your advisor, then they probably aren’t a fiduciary. They are most likely paid when you buy an investment product or insurance product. These advisors only have to make sure that their recommendation is “suitable” for you but not necessarily the best for you. See why I get so frustrated about this? To explain “suitable” versus “fiduciary” even more I like to use the example of a car salesman. If you go to a Lexus dealership, do you think you’re going to be recommended anything but a Lexus? No, you know you’re going to be recommended a Lexus, even if a Mercedes is better for you. The same is true for a financial advisor who isn’t a fiduciary, if you ask if your investments need to be changed, they are going to recommend changing them to something they sell, even if another investment option is better for you.
I could go on and on about this but I hope this helps clear things up a little and is a good starting point for analyzing the advice you’re getting. Be candid with your advisor and ask questions about how they are paid, what products their firm creates for them to sell, and what conflicts of interest they have. If they can’t answer these don’t even think twice, go find another advisor. This isn’t a foolproof way to find out if they are a fiduciary, but it’s a great starting point.
As always, please feel free to contact me with any questions you have,