What Makes A Financial Advisor A Fiduciary?

Published October 21st, 2021 

Reading Time: 4 minutes

Written by: The Zoe Team

When a professional is a fiduciary, it means that it is their legal duty to act in their clients’ best interests.

The job of a financial advisor is to help individuals achieve their goals by advising them on investing, budgeting, and saving, among other things. Because financial advisors guide the individual in their financial decisions and investments, it’s important that they are trustworthy. One indication that you can fully trust your financial advisor is if they are a fiduciary.

Most advisors get away with calling themselves a fiduciary because they legally can call themselves that as long as they are a fiduciary some of the time. We feel that’s disingenuous. You wouldn’t go to a Doctor who only has your best interest in some events, but not others. You deserve the best.

When interviewing potential financial advisors, take the time to discuss whether they will serve as fiduciaries to you. When the person providing you advice is not a fiduciary they may make investment decisions that may be in their own best interests, such as earning them higher commissions or other bonuses. 

Usually, the simplest way to find out if your financial advisor is a fiduciary is to ask them! They should be able to answer “yes” and put it in writing. Anything less should be considered a red flag.

What is a fiduciary?

When a professional is a fiduciary, it means that it is their legal duty to act in their clients’ best interests. They do this by searching for the best prices, terms, and strategies for their clients. They are required to avoid and disclose any potential conflicts of interest and provide all relevant facts to their clients.  Fiduciaries must put their clients’ needs and interests before their own, which assures the client of their financial advisor’s planning expertise. If you want to know if your financial advisor is a fiduciary, just ask them. If they aren’t, they should be able to give you a clear explanation as to why not. A red flag that you should look out for is if they work off commission or earn any sort of kickbacks on investment products they recommend. If they do, they will have more reason to sell you products that you don’t necessarily need, which may be why they don’t want to be a fiduciary. Another red flag may present itself if a financial advisor is dually registered as a broker, which means that they are not fiduciary. 

Are Brokers Fiduciaries?

If you’re in need of a fiduciary for financial advice, it’s important that you hire a true fiduciary. A common complaint from clients is that their broker claimed to be a fiduciary, but didn’t end up acting in their best interest. These problems arise because there’s a common misconception regarding who is and who isn’t a fiduciary.

Brokers, for example, are able to claim that they are fiduciaries even if they aren’t, which has caused many issues among customers. The reason that brokers feel entitled to say that they are fiduciaries is because of an act titled, Regulation Best Interest: The Broker-Dealer Standard of Conduct, passed on June 5th, 2019.

Fiduciary Rule Change

The Securities and Exchange Commission (SEC) released the  Regulation Best Interest: The Broker-Dealer Standard of Conduct to establish a “best interest” standard of conduct for brokers when they make a recommendation to a customer. However, the act has brought on controversy. As stated by the New York Times,  “Advocates worry that the changes don’t define what it means for a broker to act in a customer’s best interest, and allows brokers to rely on disclosing conflicts of interest instead of trying to mitigate or eliminate them.” In other words, although brokers claim that they are fiduciaries, they won’t necessarily put a client’s interests first. 

One of the rules of this act is that the broker must share all of the necessary financial information about fees, conflicts of interest, and legal standards of conduct with you, before making any deal or investment. Although it sounds ideal, brokers and firms have flexibility in how they tell their clients this information. 

Sometimes customers are told all of the required information, but not in a way that is easily understood by them. When brokers use confusing language regarding a sale, it can persuade the client to agree to a deal that doesn’t benefit them. As David Marotta wrote in Forbes, “Regulation Best Interest uses the language that the interests of the broker-dealer ‘not be put ahead of’ the interests of the consumer.  This is different from giving advice ‘without regard to’ the broker-dealer’s interests. Broker-dealers are not required to ‘put aside’ their own interests.” Brokers have to fulfill a “suitability obligation”, meaning transactions must only be suitable for clients’ needs. In other words, their suggestions may fit your needs, but fiduciary financial advisors may offer you better deals. 

Where to Go for Financial Advice

Being a fiduciary is an essential element to look for in your advisor. As a customer, it’s important that you are not tricked into thinking someone is a fiduciary when they aren’t. If you are looking for someone to help you with your financial decisions, the best option is to hire a fiduciary financial advisor. These advisors are commission-free, meaning they won’t have an ulterior motive to making unnecessary sales and will offer you options that are more than “suitable.”

Disclosure: This blog is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.

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