Investing,  Planning

Is My Financial Advisor a Fiduciary?


Listen, there are a couple of “F” words you really need to know.

In fact, you might have heard this “F” word in the news before and thought - that sounds like something only old people care about. I mean...the elderly. [Sorry, Mema.] Well, the word of the day is “fiduciary.” And if you are wondering how to know if your adviser has your best interest at heart, it matters to you. In fact, not knowing what the fiduciary standard is could be costing you big bucks and reducing your future wealth. Not good.

Curious? Knowledge is power, so read this quick post and protect your wallet.

In today’s post we are going to talk about what it means to be a fiduciary, why you should care ($$$ in your pocket), and how to figure out if your current (or future) financial adviser is a fiduciary.

Is my advisor a fiduciary?

The CFP® Board states that the fiduciary standard requires that the “financial adviser act solely in the client’s best interest when offering personalized financial advice. Translated into English, the financial adviser must place the best interest of their clients before their own interests. Seems straightforward - if it’s better to put the client in XYZ mutual fund instead of ABC mutual fund the financial advisor must do that.

Except, that often doesn’t happen.

Did you know that the vast majority of financial advisors do not operate under a fiduciary standard? These advisors only have to meet the much lower bar of “suitability.” Which essentially says, if you could argue that it is not unreasonable to put the client in mutual fund ABC then that’s fine. Even if it costs the client (YOU) more money.

(And because y’all read all of my posts you know that fees seriously matter to your end wealth.)

Clear as mud? Perhaps an example will help

Let’s say you tell your adviser you want to invest $50,000 in the S&P 500 index. In our vastly simplified world, your adviser has two options:

a) Suggest you invest in an extremely inexpensive S&P 500 index ETF that costs you 0.10% annually. This investment would cost you approximately $50 a year.


b) Suggest you invest in an A share S&P 500 index fund mutual fund with an expense ratio of 0.50% that happens to pay your adviser a 4% sales load plus an annual 12b-1 fee of 0.25%. Which means your first year fee would be $2,375 and the ongoing fee after that would be $375 year.

Say what? That means that after 10 years your ETF (option A) would cost you about $500 and the mutual fund (Option B) would cost you about $5,750 in fees alone. Holy cow! You don't have to be good at math to see why fees matter

Even though the mutual fund has a relatively low expense ratio (0.5%) the other fund fees  significantly increase the cost of your investment. Under the suitability standard your advisor could direct you to invest in option B regardless of whether or not that was the best choice for you. Compare this to an advisor operating under the fiduciary standard who is required to act solely in your best interest. A fiduciary would likely choose the lower cost alternative when comparing two virtually identical investments.

Fiduciary Advice on Life Insurance and Annuities

What I see more often in my work as a Fee-Only Certified Financial Planner Practitioner (that's a mouthful) are people who are sold inappropriate life insurance and annuity products. This is not to say that there is no place for life insurance and annuity products. What I am saying is that frequently I see people sold expensive, permanent life insurance policies that don't adequately insure them. These premiums are paid at the expense of other long-term investing goals.

I once heard from a young woman who was married (no kids, spouse worked) who was sold a whole life insurance policy. Based on her financial situation, she probably would have been better served with a term-life insurance policy. But, term insurance policies pay a tiny commission to the insurance agent compared to a whole life policy.

When she got a raise she called her "advisor" (again, he worked for a large mutual insurance company) and instead of boosting her 401(k) savings he advised her to buy another whole life insurance policy.

That's not fiduciary advice and in my opinion, it was the wrong advice to give.

So, how can you protect yourself and your money?

First, ask your advisor how they are paid. Are they paid by mutual fund companies to place your money in their funds (i.e. on commission)? Or is your advisor paid directly by you?

If you think you don’t pay your advisor, then your advisor very likely being paid by the mutual fund or insurance companies. This presents a potential conflict of interest.

Another distinction: Registered Investment Advisers (RIAs) are required to act as fiduciaries. Broker dealer representatives (registered reps) are not required to act as fiduciaries. Here's the trick, some advisors are "dual-registered" which means they are RIAs and Broker-dealers.

A part-time fiduciary is not sufficient. 

Ask your advisor flat out “are you a fiduciary?” “Will you acknowledge your fiduciary duty to me in writing?” Just because an investment adviser is Fee-Only does not mean they are a fiduciary. An advisor that charges a percentage of AUM (assets under management - the money you invest with them) is not necessarily a fiduciary.

For example, let's say you receive a $30,000 bonus. You might wonder if you should invest that money in your portfolio (which your advisor would be paid on) or pay down your mortgage (which your advisor would not benefit from). A fiduciary would be required to work out the pros and cons with you to determine what is truly best for you.

On the other hand, a financial representative operating under the suitability standard could simply pitch you to invest the money with him; without determining what is actually in your best interest.

Fee-Only vs. Fee-based

Consumers have become more aware of the important role of the fiduciary adviser. Which has led some financial salespeople to start referring to themselves as “fee-based.”

This is not the same thing as “Fee-Only.”

I would consider this a big red flag. Whenever you see “fee-based,” recognize that what they really mean is “commission and fees.” The term “fee-based” was deemed to be so misleading that CFP® practitioners may not use the term in describing their compensation.  It’s not that all commission-based advisers are “out to get you." You just need to know how your adviser is paid and be prepared to ask hard questions.

Am I biased?

You might say that I am biased because I choose to work as a Fee-Only fiduciary adviser. I choose to provide advice to people in this way because I firmly believe it is in your best interest. Sunshine is a powerful disinfectant when it comes to politics, the same can be said for finance.

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