Is your advisor bound by fiduciary duty and acting in your best interest?

Imagine a hypothetical situation where you are being guided through an important decision. Maybe you’re learning to rock climb or paying to have a contractor build your dream home. Which statement would you feel more confident hearing from the person helping you?

“I can assure you that everything I do and say is in your best interest.”

“I can assure you that everything I do and say is suitable.”

Given these options, most people would choose to have someone act in their best interest, as opposed to simply doing what is suitable. When hiring a financial advisor, this isn’t a hypothetical situation, it is a high-stakes choice that needs to be made, although most people don’t realize this as most advisors do not explicitly address the topic.

At this point, you are likely saying, “Wait a minute! Aren’t all advisors supposed to act in their client’s best interests?”

Sorry to be the bearer of bad news here, but no. Only advisors who are legally bound by a fiduciary duty are required to place the interests of their clients above their own. Many who refer to themselves as financial advisors are only bound by the less rigorous suitability standard.

This information may be raising a host of concerns, so let’s break it down. We’ll start by answering some of the questions you should get the answers to when hiring a financial advisor. 

 

What is a fiduciary?

Fiduciary advisors are legally bound by the standards outlined in the Investment Advisers Act of 1940. Not abiding by these standards may constitute fraud. They include:

  • Acting in the best interest of the client, which includes the advice provided.
  • A duty of undivided loyalty and utmost faith to the client.
  • Not engaging in activities that present conflicts of interest and fully disclosing those that may do so.
  • Not making misleading statements and fully and fairly disclosing all material facts to clients and prospective clients.
  • Not using client assets for personal benefit or the benefit of other clients without consent.

 

What’s the difference between the fiduciary and suitability standards?

Both standards are designed to protect investors, however, the fiduciary duty offers an increased burden on advisors to protect their clients. Suitability standards require advisors to provide suitable advice that considers the client’s personal details. These could include their age, finances, investment experience, objectives, and time horizon, as well as their risk tolerance and fees.

It does not, however, require them to put the client’s interests ahead of their own, or the financial firm with which they are associated. For example, the advisor may avoid recommending that a client take a course of action that is in their best interest if another option (that provides a higher commission to the advisor) is considered suitable enough. Unfortunately, this happens fairly often, without the client ever being aware of it.

 

What types of advisors are fiduciaries?

This question not only confuses the general public but also those who work in the industry.

In financial services, there are two primary governing bodies: the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Financial advisors may be registered with either or both. Those who are registered with the SEC must act as fiduciaries, whereas those only registered with FINRA are just bound by the suitability standard.

 

Securities and Exchange Commission (SEC)

The SEC is an independent government agency that emerged as the result of the depression-era economic climate.

The SEC regulates Registered Investment Advisors (RIAs). RIAs can be individuals, partnerships, or corporations that manage or advise on the assets of investors. Individuals employed by an RIA are referred to as Investment Advisor Representatives (IARs).

When RIAs are solely registered with the SEC (and not with FINRA), they invest their client’s money without receiving any commissions. Instead, their compensation is the result of fees assessed directly to the client.

Their sole incentive, therefore, is to do right by their clients.

 

Financial Industry Regulatory Authority (FINRA)

FINRA is a self-regulatory organization (SRO). This means that it is a private corporation – not a government agency – established to provide oversight of the financial services industry. Those advisors registered with FINRA are only required to act in accordance with suitability standards and are referred to as Registered Representatives (RR). 

 

What types of advisors are RIAs, versus RRs?

 

RIA (Fiduciary Advisor): Governed by the SEC

RIAs could be referred to as fee-only financial advisors or planners if they are not registered with FINRA at all. Their compensation is based on the quality of service provided to their clients.

As addressed earlier, this means they only derive compensation from their clients, not from third parties as the result of product sales. Fee-only advisors receive compensation through retainers, flat or hourly fees, or they may receive a percentage of the assets under management. For a breakdown of these compensation methods, click here

 

RR (Suitability Advisor): Governed by FINRA

Those advisors who act as an intermediary between firms that purchase securities and sell them to customers (broker-dealers) are called RRs, better known as brokers.

These brokers receive a commission from selling securities to clients on behalf of their broker-dealer. Some advisors are referred to as “fee-based,” which means they receive compensation from both their broker-dealer (commission) and their clients.

This is an important point to make. Unfortunately, some advisors will call themselves fiduciaries as they are registered with the SEC, but fail to mention that they are also registered with FINRA to sell products.

 

How to determine if my advisor is required to be a fiduciary

If you want to ensure that your advisor is required by law to act in your best interest, you should seek out a fee-only advisor. Unfortunately, this is not always an easy process.

Fiduciary advisors relish the opportunity to let people know they are bound to act in the client’s interest. This degree of transparency is not always the standard for Registered Representatives (RRs), who are only bound by suitability standards.

Here are some questions you can ask to help determine whether your advisor is an RIA or Registered Representative:

  • Are you a fiduciary advisor, i.e. Registered Investment Advisor (RIA) or Investment Advisor Representative (IAR)?
  • Are you a Registered Representative (RR)?
  • How are you compensated? Do you receive compensation from any other sources besides me?
  • Are you legally bound by a fiduciary duty to your clients?


For a more comprehensive list of questions, check out this blog 
on how to interview a financial advisor.

All of this may be a little overwhelming, but don’t fret. The best time to determine whether an advisor is an RIA is before you meet with them. That’s where Zoe Financial can help.

We are committed to connecting clients with our curated network of fee-only, fiduciary advisor partners, all of whom have been carefully selected as a result of their experience and high standards of client care.

The process is simple:

  • Answer Questions: Give us a little more information, to help us understand what your needs are.
  • See Results: Our algorithm hand-picks advisors best suited to your needs.
  • Schedule a Call: Review the advisor profiles, decide if they’re a good fit, and start chatting with them today!