Financial Planning Blog

Is your financial advisor a fiduciary?

This is a very important question, but one many consumers don’t know to ask. Although there are many definitions or standards of fiduciary duty, it is essentially the obligation of an advisor to act in utmost good faith and in a manner he or she reasonably believes to be in the best interest of the client. In other words, the advisor has an obligation to put the client’s interests first.

Maybe a more pertinent question is, “Why would anyone settle for anything less from a financial advisor?”

This topic is heating up on a number of levels as the government considers changes to the way to the way it regulates the financial services industry. Jason Zweig, who writes the Intelligent Investor column for the Wall Street Journal, discussed some of the issues in “The Fight Over Who Will Guard Your Nest Egg” a couple of days ago, and it’s worth taking a look at. He explains that a registered investment advisor (RIA), such as Table Rock Financial Planning, is held to a fiduciary standard. However, stock brokers and others who may describe themselves as financial planners or advisors are not necessarily held to the same standard. For example, under Financial Industry Regulatory Authority (FINRA—the self regulatory body that oversees the brokerage industry) rules, brokers are generally required to recommend “suitable” investments to their clients. And, when determining what is “suitable”, cost is not an issue. Zwieg gives the following example to show the difference:

“Let's say you tell your broker that you want to simplify your stock portfolio into an index fund. He then tells you that his firm manages an S&P-500 Index fund that is 'suitable' for you. He is under no obligation to tell you that the annual expenses that his firm charges on the fund are 10 times higher than an essentially identical fund from Vanguard. An adviser acting under fiduciary duty would have to disclose the conflict of interest and tell you that cheaper alternatives are available.”

Matthew Hougan, writing on-line for IndexUniverse.com also discussed this issue in a recent post entitled “Yes on Fiduciary Duty”. He summarized the difference between the standard for the RIA and for the broker (or “registered representative”) and then stated:

“Think about that for a minute. A registered rep can put their own interests (or the interests of their firm) ahead of the interests of the client. That's absurd, and it explains why a lot of high-load, high-cost mutual funds have been pushed down the throats of the investing public over the years. There are a lot of good registered reps out there: smart people with great ethics who do good work for clients. But come on: This shouldn't be a tough question! Finance is a serious business. You're talking about people's lives, their retirement, their children's education.”

Should your financial planner be required to act in your best interests? I would hope so.