I find it sad and disheartening that after years and years of our industry attempting to weed out the commission-fueled hyenas masquerading as professionals thereby raising the standard for legitimate financial advice, the true picture of who is a fiduciary and who isn't remains unclear.
I know this because I'm in the trenches, meeting with prospective investors, sifting through their financial documents and watching as bewilderment washes over their faces and confusion sets in when I ask them, "Is your advisor a fiduciary?"
A simple question that when asked of your landscaper or plumber (substitute fiduciary for licensed or certified or bonded), is easy to answer and prove. Not as simple, however when it comes to your financial advisor, yet why isn't it?
Surely the definition of fiduciary must be overly complex with layers upon layers of technical jargon only a few legal professionals can comprehend, right? Eh.
Fiduciary Duty Defined
The Securities and Exchange Commission (SEC) introduced the Investment Advisers Act of 1940 which spells out in black and white the duties required of a Series 65 (test required to be allowed to collect fees for managing investments) registered investment advisor:
Duty of Care - Requires the advisor provide clients with advice that's in their best interest, seek best execution and provide ongoing advice and monitoring.
Duty of Loyalty - Requires advisors to remove or disclose conflicts of interest to obtain informed consent.
Put your client first and always do what's right. Got it. Seems like a simple enough concept to grasp.
Here's where things get a little confusing.
Certified Financial Planner Designation
Effective June 30, 2020 the Certified Financial Planning (CFP) Board of Standards, a separate governing body overseeing financial professionals who've gone through the rigorous certification process to become a Certified Financial Planner (CFP), one of the most respected designations in the financial industry, took this fiduciary standard to a new level by requiring CFPs to follow 15 duties, including:
The Fiduciary Duty
Disclose and Manage Conflicts of Interest
Provide Information to Clients and Prospects
Communicate Clearly with Clients
Integrity
Competence
Diligence
Sound and Objective Professional Judgement
Professionalism
Confidentiality and Privacy
Properly Representing Compensation Method
Due Diligence Duties When Recommending, Engaging, and Working with Additional Persons
Comply with the Law
Duties When Selecting, Using and Recommending Technology
Prohibiting of Borrowing From, Lending to or Commingling Assets with Clients
In other words, an advisor having the CFP designation is not only held to the fiduciary standard, but an additional 14 standards designed to ensure the absolute best financial advice is being delivered in a conflict-free environment. Almost like a "super-fiduciary," or so it would seem. More on this later.
Broker-Dealers
Then there are the other financial advisors who aren't licensed or registered as fiduciaries. The ones doling out variable annuities as fast and vicious as a used-car salesman shoving a fleet of rusty Volvos down his customers' throats to hit quota. We call these creatures "brokers"
Reg BI and Suitability
Prior to 2020, Series 7 (a test required to sell financial products and earn commissions) licensed brokers who earned money soliciting securities, funds, annuities and other financial products were held to what's called the Suitability Standard, a lesser and almost laughable standard of care whereby the selling agent need only prove the polished-up turd they're pitching you is reasonable enough to meet your financial objectives. Imagine a Nike rep at Dick's painfully squeezing your wide feet into their last size 9 Air Pegasus despite a full stock of Hokas and On Clouds.
Thankfully, Reg BI (Regulation Best Interest) came to the rescue in 2020 and heightened the standard for broker-dealers, requiring more disclosures and a higher level of care and due diligence.
Brokers now must do what's best for their clients, not just what's suitable.
I met with a prospect a few weeks ago, four years since Reg BI was enacted. Single woman in her 60s who planned to retire soon but needed guidance with her investments, her budget and cash flow, social security, pretty much a full comprehensive financial plan. She met with three different "advisors" before me all of whom offered no guidance whatsoever regarding her financial planning needs and instead recommended she invest everything into a product paying the advisor a large commission that would tie up the cash she needs access to: an annuity.
Reg BI seems to be working like a charm!
Dually-Registered Advisors
To muddy the fiduciary waters even further, brokers can be licensed as both a Series 7 broker held to, well, not much of any standard AND a Series 65 registered fiduciary. This is referred to as being "dually-registered."
Working with a dually-registered advisor, you'll be hard-pressed to tell whether or not they're acting in your best interest (Series 65 fiduciary) or just recommending something that's kinda maybe sorta suitable (Series 7 broker).
On top of that, brokers can also be CFPs (assuming they meet the requirements and pass the exam), which I guess means they can pitch commission-based dog poo yet are held to the CFP fiduciary standards?
With all of these nuances watering down outdated regulations, it doesn't surprise me to see a confused look on an investor's face when I ask, "Is your advisor a fiduciary?"
Does the term fiduciary carry any weight?
What is a fiduciary, really?
Mark Twain put it perfectly when he said: "Actions speak louder than words." That is, what we do in life matters more than what we say. It's a phrase as old as time that my kids will hear until the day I die, and one that probably best defines what it means to be a fiduciary.
Levels of Fiduciary
Here's what I've experienced. I've worked in small advisory firms on up to large Fortune 100 institutions and have seen advisors in action at every level from the TikTok influencers to the annuity gunslingers to the multi-billion-dollar institutional RIAs. As such, I have a pretty good perspective of who the true professionals are, the bad actors to avoid, and those who don't even deserve a seat at the table.
To help you better understand whether your guy or gal is actually a fiduciary, I've broken down the various levels of advisory services you may encounter in your search for an advisor beginning with those held to no standard at all, all the way up to those held to the highest fiduciary standard:
Level 1: No Standard
Online Influencers
Listen, I'm all for DIYers getting their financial advice from YouTube or TikTok if that's their thing. I enjoy watching Blackstone grilling videos to help improve my cooking skills instead of hiring a personal chef. Just know that most of these online influencers are not registered advisors at the state or SEC level and accordingly, have no standard of care to their audience, i.e. you.
Level 2: Suitability Only
Life Insurance Agents
You'll see them lurking around chamber events and local community gatherings anxiously awaiting to vomit a stack full of business cards into your lap while warning of impending market doom, the only saving grace being, you guessed it, life insurance!
These are brokers, not advisors and they make their living earning commissions from selling insurance and annuity products. You won't find any fiduciary duty here, but your children will benefit big time by inheriting a fortune tax-free when you croak.
Bank Financial Consultants
In the same level you'll find financial consultants who work within bank branches and are tasked with cross-selling the bank's various product lines like mortgages, lines of credit and investments. They haven't quite attained full on "advisor" status yet but are able to sell mutual funds and other bank-manufactured investment products.
Are these products "suitable" for you? Probably.
Are they the best, most cost-efficient solution to help you achieve your personal financial goals? LOL.
Level 3: Suitability and Fiduciary
Bank Brokers
Next level up we find bank brokers. Once the financial consultants have earned enough Dundie awards for their sales efforts and passed a few exams, they're now full-fledged brokers with a license to sell investment products (Series 7 broker), or manage accounts for fee (Series 65 fiduciary).
These hybrid advisors are operating in that uncomfortable gray area where it's hard to tell whether their advice is regulated by the suitability standard/ Reg BI, the fiduciary standard, or a combination of both.
Plus that whole independence thing has gone out the window as the advisor is literally only recommending their bank's products while drowning you with disclosures no one in the history of the universe has ever or will ever read, so...
Level 4: Less Suitability, More Fiduciary
Dually Registered Independent Advisors
Similar to their bank broker brethren, these advisors are licensed brokers and registered fiduciaries, however they work within an independent Registered Investment Advisor (RIA) firm. As such, they're not directed to strictly push their employer's investment products like bank brokers are, but instead can look across all options from various financial institutions and choose which ones are best for their clients.
Still a little gray, though we're getting warmer.
Level 5: Bank Fiduciary
Bank Wealth Management Advisors
If you have enough money saved (typically $1 - $3 million of investable assets) to meet the bank's minimum asset requirement, you'll be placed into an elite group that sits atop the rung of bank brokers within the socioeconomic wealth pyramid in what's called private banking or trust or wealth management, whatever the high priests decide they should call themselves.
Advisors in this environment are operating under the fiduciary umbrella, earning a management fee (percentage of the investments they manage) for the services rendered.
In addition to their fiduciary duty, banks, especially large ones, have a duty to their shareholders. That means their employees are expected to meet (let's be honest, exceed) sales goals and cross-sell products to maximize the bottom line.
Fiduciary? Yes, although independence issues still exist.
Level 6: Independent Fiduciary
Independent RIAs
Sitting atop the fiduciary pyramid are RIAs. This cohort of advisors work for Registered Investment Advisor (RIA) firms that are independent of any one bank and are held to the fiduciary standard alone, whether that's the SEC's version or the 15 standards regulated by the CFP Board of Standards.
There's no suitability nonsense. No dually-registered confusion either. Just fiduciary.
Investment Advisor Representatives (IARs) operating under this model are compensated only for their services and are required to disclose to clients their fees and how they're calculated (often a percentage of assets the advisor manages, annual retainers or hourly).
On paper, RIAs are the highest level of fiduciaries in the marketplace for financial advice. Unfortunately, not all RIAs are off the hook just because they're branded a fiduciary by the SEC or CFP Board of Standards. That’s because of that whole "actions speak louder than words" thing is a tough one to prove. Here’s an example to help illustrate my point.
Hypothetical Client Example
Consider a high-earning client of an RIA looking to maximize her retirement savings and is unsure what to do with her old 401(k) plan. Her options are: 1) Roll over her 401(k) to an IRA to be managed by her fiduciary advisor, or 2) Transfer the funds to her new employer's 401(k).
By recommending Option 1, the advisor would prohibit this client from future backdoor Roth conversions (a beneficial tax loophole for high earners that helps maximize retirement savings) which may hinder her ability to optimize savings for retirement, though would allow the advisor to get paid for managing the IRA.
On the contrary, recommending Option 2 would allow the client to make backdoor Roth conversions, however the advisor wouldn't get paid for managing the IRA and the client would have to manage on her own.
Now, Option 1 may very well be, and often times is, in the best interests of the client (if she values outsourcing this stuff to a professional who can confidently help her achieve her financial goals) provided she fully understands her options including the pros and cons of each along with complete transparency on how her advisor is or isn't being compensated.
This is one of many examples of how an advisor's fiduciary status can come into question even at the highest level of financial advice.
Final Thoughts
❌ Verbally declaring one's fiduciary status doesn't make one a fiduciary.
❌ Having top-tier credentials like a CFP or CFA doesn't make one a fiduciary.
❌ Obtaining a Series 65 license and managing investments for a fee doesn't make one a fiduciary.
❌ Working at a large bank in their private wealth department doesn't make one a fiduciary.
✅ Only one who's licensed as a fiduciary AND one who acts as a fiduciary at all times can truly call themselves a fiduciary.
It's a hard distinction to grasp because it means you won't really know if your advisor is a fiduciary until after you hire them.
It also means that not all brokers, dually registered advisors and bank employees are bad people. There are many advisors in these categories I know personally whose actions are always aligned with their clients' best interests regardless of the words defining their regulatory environment.
Good fiduciaries will operate within the confines of the fiduciary standard.
Great fiduciaries will go out of their way to help you, even if it means they don't get paid.
Do yourself a favor and don't settle for just the standard.
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