When you hire a financial advisor, you are entering a long-term relationship with a person who will know almost everything about your financial life. It is nearly impossible to know who to trust with your money especially when some financial advisors have their income tied to products they sell rather than offering the best investment advice. Hence the importance to carefully vet potential candidates. To protect yourself and your money, there is one essential question to ask: Are you a Fiduciary?
Their answer to this question helps you know whether the potential financial advisor has your best interest at heart or not. Financial advice is subject to a double legal standard. Fortunately, there’s a term the investment world has been using since at least the 1940s to describe the highest standard of advice. It’s called fiduciary advice.
A fiduciary advisor is required to place the interest of their client above their own -- even when it means they make less money on a trade or sale. Additionally, they avoid potential conflicts of interest that might influence a client’s decision to use their services.
A non-fiduciary financial advisor, on the other hand is free to recommend higher fee products that just happen to offer a bigger commission to the broker and they only need to disclose the conflict of interest - not avoid them.
Why Fiduciary Advice (Still) Matters
Investors deserve nothing less than full transparency from anyone entrusted with advising them about their personal wealth. For decades, the fiduciary standard has shaped this highest level of care for those of us committed to delivering it. We believe investors deserve better- than advice that is merely suitable for their life’s savings. That’s why I established Tobin Investment Planning LLC as a fee-only Registered Investment Advisor, which commits to always and exclusively fiduciary advice. Every client of Tobin Investment Planning LLC receives a signed pledge, “Putting my Clients’ Interest First”, to make clear our fiduciary relationship.
Having a fiduciary duty to our clients puts us on similar footing with other professional consultants, such as physicians or attorneys. You hire us partly because we have dedicated our career to understanding every facet of your wealth. But you also hire us to always use our knowledge to advise you according to your highest financial interests.
Unfortunately, the fiduciary standard has been under attack lately. A recent Securities and Exchange Commission (SEC) overhaul has downplayed rather than strengthened its significance by overlaying it with a new industry standard, paradoxically called “Regulation Best Interest.”
To our frustration, it has probably become harder instead of easier for you to know when you are receiving fiduciary level of care … and just as significantly, when you are not. As Phyllis Borzi, Dept. of Labor EBSA head, 2009–2017 said in an interview with ThinkAdvisor, “everybody claims to be a trusted advisor when some are really only salespeople.”
A Reg BI Checklist for Fiduciary vs. Broker-Dealer Investment Recommendations
Ideal Full-Time Fiduciary Advice
Typical Broker-Dealer Investment Advice
Your advisor’s sole, continuous duty is to advance your highest financial interests (even ahead of their own).
A broker, banker, CPA or insurance rep offers other core services, along with point-of-sale investment recommendations.
Your advisor deeply understands and accounts for the details of your total wealth interests, and advises you accordingly, always in a fiduciary capacity.
A broker’s primary role is to transact trades; a banker custodies accounts; an insurance rep sells insurance. Incidental investment advice is secondary to these roles. Not all transactions are subject to fiduciary duty.
As a fully independent Registered Investment Advisor (RIA) firm, your advisor’s only “boss” should be investor clients like you.
Employed by a bank, brokerage house or insurance agent, a broker-dealer’s, banker’s, or agent’s “boss” is their employer.
Your advisor’s compensation should preferably be fee-only, so their only financial incentives come from investor clients like you.
Commissioned or fee-based intermediaries earn part or all of their keep from their employer or through other (often opaque) sales incentives.
First, it’s essential to have a plan. It should be grounded in evidence over emotion, structured to manage all your investments in unity, and tailored to patiently capture expected returns according to your personal goals and risk tolerance.
Investment recommendations are more typically offered as a point-of-sale, add-on service. They are unlikely to be guided by your big-picture plans; coordinated with the rest of your assets; or personalized to advance your total wealth interests.
Conflicts of Interest
Ideally, your advisor has minimized any conflicts of interest by embracing all of the above best practices – not only because it’s required, but because it’s the right thing to do.
New regulations aimed at minimizing and disclosing conflicts of interest may have been tacked onto, rather than integrated into the company’s core role and mission.
When is the last time you read a financial disclosure, and understood what it meant or asked probing questions? For most of us, it’s been a while. As such, legal disclosures alone may fail to protect investors from falling for sales pitches in disguise.
However, one important way to determine whether your advisor will be acting as your fiduciary is to ask this simple question:
Will you agree to a fiduciary relationship in writing? How reliable are verbal assurances if an advisor won’t agree to the same in writing? In our estimation, any advisor worth heeding should be happy to sign such an oath. You can find Tobin Investment Planning LLC oath right on our website.
We hope to update this important piece over time with improved news. Until then, we encourage you to use the table above as a handy checklist for determining when an investment recommendation is most likely to truly be in your highest financial interest … and when it’s only suitable. Then again, just ask for a signed fiduciary oath!
What additional questions can we address for you at this time? Please let us know.
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