Is Your Financial Advisor a Fiduciary?

[00:00:00] Eric Brotman: This is Eric Brotman, the host of Don’t Retire… Graduate!: The podcast that teaches you how to advance into retirement rather than retreating. Welcome to Office Hours where we answer listeners’ questions about personal finance, retirement readiness, and more. We received a question from Gary who asks, “are all financial advisors and planners fiduciaries?”

And Gary, this is a very important question. I’m glad you asked it. And I think before I even try to answer your question, I’d like to define what fiduciary is because there are so many different ways to look at this. And and it’s in the news constantly. Is, are you a fiduciary? So what a fiduciary is in simplest of terms is someone who must put their, their client’s interests ahead of their own. And so that could mean a financial advisor who’s a fiduciary putting client interests ahead of their own. It could also mean that you’re the trustee for a family trust and you have to put the beneficiaries of the trust and their interests ahead of your own as trustee. So there are lots of different types of fiduciary relationships.

At the end of the day it’s a critically important component and a good question to ask your financial advisor or several financial advisors if you’re considering hiring one. Most financial advisors are not fiduciaries. And when I say that, I know people cringe but the reality is that there are certain designations and certain situations where being a fiduciary is critically important.

There are others for all kinds of legislative reasons where you don’t have to be a fiduciary to call yourself a financial advisor. So if you’re a Certified Financial Planner™ practitioner, a CFP®, you are a fiduciary. That is your responsibility is always to put your client’s interest ahead of your own.

If you are not, then it comes down to what type of relationship you have with your clients. So there are situations where a financial advisor may be selling product. They might even be employed by a specific company. So if, if advisor X works for an insurance company and sells product by that insurance company, not only is that person not a fiduciary, that person is not even representing the client’s interests ahead of the employer’s interests because the duty to the employer supersedes the duty to the client. That is everything that’s wrong with the financial advisory business in a nutshell. And insurance companies and brokerage firms and, and fund companies and trust companies and all these organizations that manufacture their own product and then have sales forces are doing the world an incredible disservice, and it goes beyond that, Gary.

They also have an intense lobby. So recently there were new regulations that came out it’s called regulation BI or reg BI, which means regulation best interest. It is a watered down version of the fiduciary rule because no one could agree on what a fiduciary was or whether all financial advisors should be fiduciaries. And to be clear, I believe all financial advisors should be fiduciaries.

And I don’t think you can, you can just disclaim or disclose away various conflicts of interest. It’s incredibly important to be transparent. That said, the vast majority of financial advisors or planners or people who call themselves financial advisors are not fiduciaries and some of this is buyer beware.

So Gary, how can, you know, if someone’s a fiduciary? One, you can ask them point blank. Two, you can look at their what’s called form ADV, which is a form that they must provide for you. If they’re doing any type of asset management for you with discretion. If they are serving in a capacity where they are making trade decisions on your behalf or investment decisions on your behalf without discussing them with you first.

Now that doesn’t necessarily mean it’s a good thing or a bad thing. It depends on your relationship for us. Most of our relationships do have discretion. It allows us to rebalance portfolios and so forth. But it’s imperative that, that all of those disclosures be made and that you understand that that has to be done in a way that’s in your best interest and not mine or anyone else’s in our firm.

The other thing you can ask about, ask about someone’s employment relationship. Are they employed by a, a bank, a trust company, an insurance company, a brokerage firm, a mutual fund company, any type of organization? It doesn’t mean they’re not quality advisors. It just means that they are serving multiple, multiple masters.

They are looking at not only a duty to their employer. They’re looking at her duty to their client, too, and that can be a conflict. And if there’s a sales competition that for whichever advisor sells as much of this company’s product as possible gets to go to Rio or something, that’s a problem. And I don’t, I don’t think you can put lipstick on that pig and say it’s beautiful.

It’s a problem. And so I, I, I hope I’ve answered your question. The answer is a resounding no. All financial advisors and planners are in fact not fiduciaries. Most are not. And it’s important to find out when you’re working with somebody if that is the case. Again, it does not mean that someone’s not a quality advisor.

I’m not trying to besmirch anyone, but if that’s important to you you do need to dig a little deeper sometimes. So, Gary, thanks for your question. If you’d like to send us a question, which we might answer in a future episode of office hours, post it on our Facebook page or tweet us at Brotmanplanning.

If you like, what you hear, please subscribe to our podcast and leave a rating on Spotify or wherever you listen to your favorite shows. Please also check out our books, workbooks and online financial literacy resources at brotmanmedia.com. Thanks for coming to office hours. Be sure to tune in for new content every Thursday for now, this is your host, Eric Brotman, and reminding you don’t retire. Graduate!