Why Working With a Fiduciary Financial Advisor Matters
"Financial advisor" is a title used by professionals held to very different legal standards. Depending on how they're licensed and paid, the person managing your retirement savings may owe you an ongoing fiduciary duty, or only obligations that apply when they make a recommendation. Here's how the standards differ and how to tell which one applies to you.
What it means to be a fiduciary
A registered investment adviser owes its clients a fiduciary duty under the Investment Advisers Act of 1940 and state law. The SEC describes it as a duty of care and a duty of loyalty that apply to the entire advisory relationship, not just individual transactions. (source)
In practice, the advice has to fit your goals and circumstances, and the adviser can't put its own interests ahead of yours. Conflicts of interest must be eliminated or fully disclosed. (source) CFP® professionals also owe a fiduciary duty under CFP Board standards whenever they give financial advice.
How brokers are regulated
Brokers, also called registered representatives, work for broker-dealers and are typically paid commissions tied to the products and transactions they recommend. Since June 30, 2020, they've been held to the SEC's Regulation Best Interest, which requires their recommendations to retail customers to be in the customer's best interest and bars them from placing their own interest ahead of the customer's at that time. (source)
It was a real improvement over the older suitability standard, but it isn't a fiduciary duty. It applies to each recommendation rather than the whole relationship, and broker-dealers generally aren't required to monitor your account afterward. (source) Commission-based pay is still allowed as long as the resulting conflicts are disclosed and managed.
How insurance agents are regulated
Insurance agents are licensed by each state and usually paid commissions by the insurance companies whose products they sell. They aren't held to a fiduciary standard. Annuity recommendations were long held to a suitability standard, meaning appropriate for you but not necessarily the best option.
Every state has now adopted a best interest standard for annuities, most based on a national model rule, with New Jersey the 50th. (source) Agents can't put their own financial interest ahead of yours, but the model rule explicitly doesn't create a fiduciary relationship, and commissions remain standard. (source)
When one advisor wears several hats
Many professionals are dually registered as both an investment adviser representative and a broker, and many also hold insurance licenses. With the same client, they may act as a fiduciary on an advisory account, under Regulation Best Interest on a brokerage product, and under insurance rules on an annuity. They generally must disclose which role they're in, but it's easy to lose track.
Compensation labels add to the confusion. A fee-only advisor is paid only by clients and doesn't accept commissions. A fee-based advisor charges fees but may also earn commissions. The names sound alike, but the incentives can be very different.
Why the standard matters for your money
Plenty of brokers and agents serve clients well. The issue is that different rules and pay structures create different pressures, and those pressures show up at the biggest decisions.
Take a rollover from an old 401(k). A fiduciary has to weigh whether moving the money actually helps you, including the fees and options you'd give up. When an advisor earns a commission on what you buy next, the incentive leans toward moving the money, even if the recommendation still clears the best interest bar. The same tension applies to annuities and permanent life insurance, which can pay meaningful commissions and carry surrender charges. Sometimes they're the right tool. A fiduciary's job is to tell you when they aren't, and to keep the advice current as your life changes.
Fiduciaries have conflicts too
No advisor is conflict-free. One who charges a percentage of assets earns less if you use savings to pay off your mortgage, even when that's the right move. The difference is that a fiduciary must eliminate or fully disclose conflicts and still put your interests first. A registered investment adviser describes its fees, services, and conflicts in its Form ADV brochure, which it must give you before or when you sign an advisory agreement. The fiduciary standard is a strong starting point, not a guarantee.
How to check who you're working with
Ask directly, ideally in writing: "Are you a fiduciary at all times, for all of the advice you give me?" Then ask how they're paid and whether they earn commissions. Hesitation or a qualified answer tells you something. You can also verify on your own: FINRA's BrokerCheck and the SEC's adviserinfo.sec.gov show how someone is registered and any disciplinary history, and CFP Board's website confirms CFP® certification.
Work with a fee-only fiduciary
Reliant Wealth Advisory is a fee-only fiduciary firm. We're paid only by our clients, earn no commissions, and owe you a fiduciary duty across the entire relationship. Book a 30-minute call with no obligation.
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About the author
Michael Walstedt, CFA, CFP®, is the founder of Reliant Wealth Advisory, a fee-only fiduciary firm in Hoboken, New Jersey. He helps business owners, executives, and tech professionals in the New York/New Jersey area, as well as nationwide, with financial planning and investment management.
This article is for educational purposes only and is not legal, tax, or investment advice. Regulatory standards described here may change and can vary by state and by the services a professional provides. Reliant Wealth Advisory's services, fees, and conflicts of interest are described in its Form ADV, available at adviserinfo.sec.gov.
