Broker vs. Fiduciary: Who’s Minding Your Finances?

Feb 3, 2017 Dave Homan Posted in Articles

Does your financial adviser have your best interests at heart? How can you be sure? Is your adviser a fiduciary or not? If you’re not sure, it may be a good time to find out. The fiduciary standard of care was laid out in the Investment Adviser Act of 1940. This standard requires registered investment advisers, or RIAs, to act in a client’s best interests with the intent to eliminate, or disclose, all potential conflicts of interest which might cause the adviser to render advice that is not in the best interests of the client. Unfortunately, neither the financial industry nor lawmakers have yet to establish a consistent adviser standard for providing investment recommendations to retail investors.  


Broker dealers, insurance salespersons, and advisers operating under the “suitability standard” are not to be deemed investment advisers and therefore are not subject to the same fiduciary standards as RIA when recommending investments to investors. They are only required to have a reasonable basis for believing an investment is suitable based on personal situation — considering income, net worth, investment objectives, risk tolerance, and other assets. The President’s Council of Economic Advisers estimates that nonfiduciary advice costs American investors 1 percent of their return annually, amounting to $17 billion lost dollars each year. This is most likely due to the transactional nature of the relationship between the adviser and client.  


Not only does the fiduciary standard of care require RIAs to act in utmost good faith and in a manner he or she believes to be in your best interest, ahead of his own, but also it means that all recommendations, services, and/or products include the best possible options for you. The best fiduciary relationships also include the ongoing monitoring of your personal situation and life transitions (employment changes, an unexpected windfall, children, etc.) that may warrant a change in financial recommendations or investment strategy.  


Here are some questions to think about asking when considering working with an adviser. 1. Are you a fiduciary? In most cases the benefits of working with a fiduciary make sense for the long-term investor. 2. How often will you monitor my investments? Investors don’t ask this question often enough, assuming their adviser keeps a close eye on their portfolio. If your adviser is not analyzing your portfolio at least quarterly, you may want to discuss the services offered for the fee you pay. 3. How are you compensated? Disclosure requirements have improved since the last financial crisis, but “hidden” fees remain. Is your adviser working for free? Very low fees should be carefully scrutinized by an investor. The adviser may be receiving undisclosed compensation called “soft dollars” — basically kickbacks for selling a particular investment product that may or may not be in your best interests to purchase. With a new year ahead and much uncertainty in the new political environment, it may be time to review your financial situation. Working with a trusted adviser who has your best interests at heart can provide peace of mind and a sense of financial security.