Does Your Advisor Act in Your Best Interests?
June 30, 2015

Do you know if your advisor is a fiduciary?

Is your financial advisor required to put your interests ahead of his or her own and those of the firm? Most likely not.

If your advisor works for a brokerage firm or a bank, is an insurance agent or even an independent advisor affiliated with a broker-dealer, he or she is only subject to a “suitability” requirement. “Suitability” means that an advisor’s recommendations must only be “suitable” to the client’s investment profile, but may select investment choices that pay them higher commissions even if it is inferior to other choices. Such advisors are not required by law to act in their clients’ best interests.  Often, they receive compensation from a variety of sources including commissions, a model that can put them in conflict with their clients’ interests.

If your advisor chooses to register as a  fiduciary , then by law, he or she must always act in the best interests of his or her clients. A “fiduciary” is:  An individual in whom another has placed the utmost trust and confidence to manage and protect property or money. The relationship wherein one person has an obligation to act for another’s benefit.  Typically, such advisors receive compensation from asset management fees. Under the law, this model eliminates this type of conflict of interest and puts the client first.

Due to the abuses, such as taking excess commissions and investing clients in inappropriate products by non-fiduciary advisors, the U.S. Department of Labor is proposing to expand the fiduciary standard to those brokers who are managing retirement funds for individuals, including holdings such as 401(k) assets and individual retirement accounts (IRA).

How can you find out if your advisor is a fiduciary? Investment advisors registered with the U.S. Securities and Exchange Commission (SEC) or a state regulator are fiduciaries. Those advisors who are not fiduciaries register with FINRA, the Financial Industry Regulatory Authority, an organization not affiliated with the government. Ask your advisor for his or her disclosure document. It will identify which organization he or she is registered with and discloses all the areas where they are allowed to take additional fees that you may not be aware of and where they can put your funds into investments where there is a greater economic benefit to them vs. using another vehicle or fund. 

Susan Templeton

June 2015