Fiduciary Financial Advisor
What is a fiduciary financial advisor, and why should you insist on working with a fiduciary?
This is a challenging subject, indeed. First, the stakes are high. The quality of your selection, or lack thereof, can make or break your family’s fortune.
Also, the choices can be bewildering. It can be challenging to determine what to look for and who to trust.
Let’s cut through some of the confusion in determining who a fiduciary financial advisor is with three essential steps for finding an advisor who is a good fit for you and your wealth:
- Understanding the advisory environment
- Addressing the decisive details
- Doing your due diligence
Part 1: Understanding the Advisory Environment
How do I know if my Financial Advisor is a Fiduciary?
Physicians practice according to a familiar standard in the medical profession: “First, do no harm.” It seems there should be a similar level of commitment for anyone who wants to advise you about your financial well-being, right?
Unfortunately, not always. Financial advice remains subject to troublesome double standards. It’s still up to you to spot the subtle differences and heed the quality of advice accordingly.
Red tape and legal jargon aside, we suggest seeking advice that exemplifies a few simple ideals:
“There’s no confusion in the minds of investors as to what they want. They’re very clear. They want somebody they trust who makes recommendations that put their interest first and don’t allow the advisor to profit financially at their expense.” — Phyllis Borzi, Dept. of Labor EBSA head, 2009–2017
That makes sense, doesn’t it? There’s even a term the investment world has been using since at least the 1940s to describe this highest standard. It’s called fiduciary advice.
Why Fiduciary Advice (Still) Matters
Fiduciary advice makes sense to us too. Investors deserve nothing less than the fairest possible shake from anyone entrusted with advising them about their personal wealth. For decades, the fiduciary standard – in contrast with a lesser “suitability standard” – has shaped this highest level of care for those of us committed to delivering it.
However, to our frustration, a 2020 Securities and Exchange Commission (SEC) overhaul has downplayed rather than strengthened the fiduciary standard. The SEC has overlaid fiduciary duty with new industry protocols, paradoxically called Regulation Best Interest Disclosure Obligation (Reg BI).
Despite its promising name, Reg BI may muddy what clarity existed between higher and lesser standards of advisory care. By attempting to apply the same broad rules to financial providers of every stripe, Reg BI threatens to discount the still-stark differences between them.
In theory: Anyone offering investment recommendations is supposed to minimize their conflicts of interest and disclose any inherent conflicts they cannot eliminate.
In reality: Not all financial advice and investment recommendations are created equally:
- Ideal Full-Time Fiduciary Financial Advisor: An independent financial advisor’s sole duty and source of compensation across your entire relationship is to advise you according to your highest overall financial interests (even ahead of their own).
- Typical Broker-Dealer Investment Recommendations: A broker, banker, or insurance rep is focused on other financial services while potentially tacking on point-of-sale (incidental) investment recommendations.
Even if a broker-dealer is doing their best to recommend sound investments, they are unlikely to be aware of the intricate interplay among your total wealth interests. Without that critical context, how can they know whether a particular recommendation is genuinely best for you and your bigger picture?
Practically speaking: Investors must still sort out what else may be driving stand-alone recommendations. While legal disclosures can help, when was the last time you read and understood what it meant (or asked probing questions until you did)? For most, it’s been a while. As such, disclosures alone may fail to protect investors from falling for sales pitches in disguise.
To learn more, we have published a more detailed report, “What Is Fiduciary Advice, and Why Does It Matter?” We’d be happy to share it with you upon request!
Part 2: Addressing the Decisive Details
What is a Fiduciary Financial Advisor?
Beyond accepting fiduciary duty, there are other important qualities to seek from an advisor who is willing and able to sit on the same side of the table as you and your highest financial interests. These qualities include their:
- Business structure
- Regulatory agent
- Compensation arrangements
- Investment strategy
- Custody arrangements
Business Structure: The Registered Investment Advisor Firm
By law, independent Registered Investment Advisor firms (like RCS Financial Planning) must provide strictly fiduciary advice to their clients across everything we do for you. In contrast, brokerages, banks, insurance agencies, and other transactional businesses are not primarily in the advisory business. A broker’s primary role is transacting trades; a banker custodies accounts; an insurance rep sells insurance. Stand-alone investment recommendations are secondary to these roles. Not all of their services are subject to a fiduciary standard of care.
Regulatory Agent: Seek SEC or State Oversight
A short-hand approach to help differentiate an independent Registered Investment Advisor from others is identifying which regulator oversees the firm.
- Registered Investment Advisor firms are regulated by either the SEC or their state (depending on the firm size measured by assets under management).
- Brokers are regulated by the Financial Industry Regulatory Agency (FINRA).
How do I know if my advisor is a fiduciary? Compensation Arrangements: Is Your Advisor Fee-Only?
Another way to tell how well your advisor’s interests are aligned with yours is by determining their sources of compensation.
Is your would-be advisor or their parent employer receiving commissions or other incentives from third-party sources (i.e., not you)? Even if these arrangements are disclosed in the fine print, your relationship can become tainted by incentives that have nothing to do with you and your best interest.
Why accept an awkward arrangement when it can be easily eliminated by working with a fee-only financial advisor? A transparent, fee-only relationship ensures your advisor is on your “team” and nobody else’s. Fee-Only Fiduciary Financial Advisors are best positioned to offer the impartial, product-neutral advice you deserve.
A fee-based financial advisor warrants further inspection. Fee-based financial advisors receive your fees plus commissions from third parties. Because fee-based financial advisors can collect commissions in addition to a fee, conflicts of interest exist in this arrangement.
Investment Planning and Execution: How Stable Is the Strategy?
How is your advisor managing your money?
- Do they offer a written Investment Policy Statement that documents your personal financial goals and strategies for achieving them?
- Is your portfolio structured according to decades of robust evidence indicating how to capture long-term market growth according to your personal goals and risk tolerances?
- Is the strategy implemented with efficient, low-cost solutions that use this evidence?
- Are your assets considered an integrated whole, whether directly under your advisor’s management or held outside accounts such as your company’s retirement plan?
Look for a comprehensive investment approach your advisor can integrate into your total wealth and overall financial interests.
Custody Arrangements: Insist on Independence
Even if your advisor checks out so far, there’s one more way to safeguard your interests. After all, Bernie Madoff looked fine on paper before he was exposed as a smooth-talking criminal.
To protect yourself against scoundrels, your money should be held in your name at a fully independent custodian that reports directly to you. For example, we partner with TD Ameritrade and Fidelity at RCS Financial Planning to act as our clients’ independent custodians.
Ensuring your money is held at a separate custodian allows you to review your financial statements sent directly from the custodian to you. (In contrast, Madoff maintained custody of his clients’ accounts at his New York brokerage house, enabling him to falsify their reports.) It also lets you log into your account anytime to keep an ongoing eye on your assets.
Part 3: How to find a Fiduciary Financial Advisor
So, how do you recognize good financial advice in a crowded field of look-alikes?
Narrow the Field
First, to summarize what we’ve covered so far, here is a handy checklist you can use to narrow down your search.
A Checklist for Identifying an Ideal Advisor
- Relationship: Your advisor’s sole, continuous duty should be to advance your highest financial interests (even ahead of their own).
- Primary Role: Your advisor should deeply understand and account for your total wealth interests and advise you accordingly, in a fiduciary capacity, across your entire relationship.
- Employment Status: As a fully independent Registered Investment Advisor firm, your advisor’s only “boss” should be investor clients like you.
- Compensation: Your advisor’s compensation should be fee-only, so their only financial incentives come from investor clients like you.
- Investment Plan: First, it’s essential to have an investment plan. Your investment plan should be grounded in evidence over emotion. It should be structured to manage all your investments in unity and tailored to patiently capture expected returns according to your personal goals and risk tolerance.
- Custody of Assets: Your investment accounts should be held by an independent custodian who reports directly to you.
- Conflicts of Interest: Your advisor should minimize any conflicts of interest by embracing all of the above best practices– not only when they’re required but also because they’re the right things to do.
Ask the Advisor
Checklist in hand, any reputable advisor should relish your deep, candid questions, no matter how detailed or direct they may be. However, suppose the advisor’s response seems incomplete, confusing, defensive, or otherwise lacking. In that case, this may indicate a poor fit, even if everything else checks out fine.
Here are three good questions that cover a lot of ground:
- Will your relationship with me be only and always as my fiduciary financial advisor? Take no less than an unqualified “yes,” with no ifs, ands, or buts.
- Can the same be said for your entire firm and its full range of services? Some firms may have a mixture of services, with employees who are dually registered. Dually registered (or fee-based) means some of their services are dispensed with broker/dealer hats on, while at other times, they act as your advisor. It may be unclear when and whether they’re working for you or their employer.
- Will you and your firm agree to a fiduciary relationship in writing? How reliable are verbal assurances if you can’t get them in plain writing? For example, here are three sources for the simple but powerful language you can use to craft a fiduciary oath. In our estimation, any advisor worth heeding should be willing and able to sign such an oath.
- The Committee for the Fiduciary Standard Fiduciary Oath
- The Natl. Assn. of Personal Financial Advisors (NAPFA) Fiduciary Oath
- The Institute for the Fiduciary Standard Code of Ethics
Check the Advisor’s Records
The financial industry is highly regulated, with required disclosures to describe a firm’s conflicts of interest, how they are compensated, whether they’ve had past “incidents,” and more.
Since these reports exist, we highly recommend taking advantage of them.
Form ADV: Whether registered with their state or the SEC, Registered Investment Advisor firms of any size must file a Form ADV. You can find an Advisor’s Form ADV on the SEC’s Investment Adviser Public Disclosure website. The firm’s ADV “Part 2 Brochure” is a good place to start since the rest of the ADV tends to be more technical. (Here’s a link to our Form ADV Part 2 Brochure.)
FINRA BrokerCheck: Most advisors should also be listed in FINRA’s BrokerCheck, where you may find additional information and disclosures. (Although the name suggests it’s a repository for broker disclosures, the resource actually reports on both advisors and broker/dealers.)
Form CRS: Many firms must also now publish a Client Relationship Summary, or Form CRS, with additional, simplified disclosures. Under Reg BI, two groups must file these: (1) broker/dealers offering incidental investment recommendations and (2) Registered Investment Advisor firms registered with the SEC. Most smaller, state-regulated advisors are not yet required to do so. A firm’s Form CRS should be available on its website, or you can request a copy of the same.
Professional Affiliations: Does an advisor hold professional credentials, such as a CFP® mark? Some organizations provide consumer-facing reports on their membership.
Google: You can also deploy your favorite search engine to see what the virtual world has to say about an advisor and their firm. Especially if a name is relatively common, make sure you’ve got accurate hits. And remember, some sources will be far more reputable than others.
Finding Your Right-Fitting Advisor: Coming Full Circle
Finding Your Fee-Only Fiduciary Financial Advisor
So, in selecting a fiduciary financial advisor, how do you know if you’re making a wise choice?
First, make sure they will uphold a fiduciary duty to you across your entire relationship and agree to that in writing. Use our checklist to determine whether the advisor is well-positioned to sit on your side of the table.
Also, review their background, asking critical questions. Take advantage of the advisor’s Form ADV, Form CRS, and other resources to facilitate your due diligence.
Beyond that, look for someone you get along with on a personal level. If you and your advisor don’t “click,” even good advice may be hard to take.
We invite you to access our Form ADV and Form CRS to learn more about RCS Financial Planning. We are proud to be a fiduciary, fee-only Registered Investment Advisor firm. We offer an evidence-based investment strategy guided by your highest financial interests and total wealth care.
Together, let’s explore your financial possibilities. We look forward to answering any questions you may have.