Post Updated on August 22, 2024 by Taylor.
There has been a battle brewing, over the past 15 years of my career, within the investment management industry. That battle is centered on the role of a “fiduciary” for financial advice.
Generally, there are two competing parties involved: the registered investment advisor community and the traditional broker-dealer world. The former is built on a ‘fiduciary’ standard, whereas the broker-dealer community is built on a ‘suitability’ requirement. This is a significant difference and has tremendous implications in how financial advice is delivered.
At basic level a fiduciary responsibility implies that any advice given must be in a client’s best interest. On the other hand, to provide financial advice using a suitability standard means advisors can recommend products and services that don’t align with the clients best interest. Their advice has to be ‘suitable’ for the client, but it doesn’t follow the more stringent requirements of the fiduciary standard. This is most often used by traditional investment groups.
This is a major distinction in the financial services industry. It’s important to know whether or not an advisor you work with has a fiduciary duty to you, the client.
Let’s break down what a fiduciary financial advisor looks like and why it matters to you.
There are three standards that need to be met to be considered a fiduciary advisor.
1) Duty of Loyalty
A Duty of Loyalty puts the client’s interests first, above the advisor or the advisor’s company’s financial interests. This means the advisor must be certain that they cater the strategies, products and services they’re recommending to each individual client, based on their unique, individual needs.
This might seem obvious, but the reality is that there are a number of things that could get in the way of this. For one thing, it takes more skill to assess a wide variety of products and match the best one to each client. It’s much easier to have a ‘go-to’ product recommendation. Similarly, an advisor might be offered a hefty promotional deal for a specific product or investment strategy. Recommendation bias can be tempting, but when you’re in a fiduciary relationship with a client, an advisor’s personal gain legally cannot come first.
2) Duty of Care
Duty of Care means the person providing the guidance and insight must have the tools, information, and skill to provide the correct recommendations for their clients. Essentially, this is to ensure there’s thorough and accurate analysis to recommend any product or service.
This is about competency. Has the advisor done a thorough and accurate assessment of their client’s situation? Do their suggestions align with their client’s actual goals? Do the products and services the client is receiving make sense based on their individual needs?
To operate under fiduciary rule is to ensure all the important stones have been turned to ensure every aspect of the client’s financial life is accounted for and addressed.
3) Transparency
This is an important one for me. As a financial advisor, transparency is about disclosing fees, any other arrangements of compensation, as well as third-party compensation. A client has a right to know where the motivations and incentives lie for their advisor. Wouldn’t you want to know if your advisor was getting kickbacks?
This clarity builds trust and ease between client and advisor. When everything is on the table, it’s easier to pinpoint the best financial plan for you.
Combining these three levels—the Duty of Loyalty, Duty of Care, and Transparency—creates a fiduciary relationship.
So, why does it matter and how do you know if your advisor has a fiduciary responsibility to you?
As a client, you want to know that your financial advisor has your—and only your—best interests at heart. A fiduciary relationship ensures the decisions you make together are not only fiscally sound, but align with your values and your long-term goals. You do not want your financial future to be centered on someone else’s financial gain.
Short of asking your financial advisor point-blank, one of the easiest ways to determine whether or not someone is operating under fiduciary management is to check their credentials. Specifically, look for the “CFP®,” or “CERTIFIED FINANCIAL PLANNER®” credential.
CERTIFIED FINANCIAL PLANNERS® are obligated to operate as Fiduciaries.
When it comes to financial planning, credentials do matter. While the umbrella term, “Financial Advisor” is widely used, the net it casts is a bit too wide for comfort.
There are many people out there who are calling themselves Financial Advisors, but they’re masquerading. They’re not advisors so much as sales people. They’re selling a very specific product, which could be anything from an insurance product to an investment strategy. These “advisors” are not required to give any tangible advice as much as get their client to buy into one product or another.
That’s why credentials like “CERTIFIED FINANCIAL PLANNER®” exist. That is what I am, here at Four Points Wealth Management in Greenwood Village, Colorado.
The CFP® credential, which is one of the highest levels of credentials an advisor can have, differentiates a person or company from the average financial advisor. To be a CFP®, you must go through rigorous education and testing to obtain the CFP® mark. A fiduciary responsibility is built-in to this credential.
As such, I have a fiduciary responsibility to my clients around the financial planning services that I provide. When I provide insights, guidance, and advice, my clients know they are getting that fiduciary level of service and care that is required by that credential.
I value my fiduciary duty because it allows me to build a strong foundation for how I work with my clients, both from an investment standpoint as well as a financial planning standpoint.
When you are looking for a financial advisor, it’s important to know, like, and trust that person. It’s also important to ask if they have a fiduciary relationship with you. It’s not just about asking if they’ll do good business—it’s about whether they have a standard that they legally have to uphold. That will protect you as the end client.
Having that fiduciary relationship will ensure you’re getting the most sound advice based on your personal situation. If you are in the Denver, Colorado area and looking for a CERTIFIED FINANCIAL PLANNER®, my team and I at Four Points Wealth Management are here to help. We look forward to connecting with you.
Four Points Wealth Management
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