When it comes to receiving advice about your money, you want to have confidence that the guidance you receive is in your best interest.
In the United States, that means working with a financial advisor who has fiduciary status. But there’s something that many people don’t realize: not everyone in this profession is required to abide by these rules and put your needs before theirs.
Here’s how to make sure your advisor is the best fit for the job and why it’s important to be a fiduciary.
Under US law, registered investment advisors (RIAs) must act as fiduciaries. They owe customers both a duty of care and a duty of loyalty.
Duty of care means that the advisor must have a reasonable understanding of your financial situation, your objectives and limitations, and make recommendations that are in your best interests.
The duty of loyalty means that the advisor must put your interests before his own. They must avoid or disclose any conflict of interest. In other words, they cannot put their own financial incentives before their well-being.
The U.S. Securities and Exchange Commission (SEC) reaffirmed in 2019 that these fiduciary obligations cannot be eliminated by contract or disclosure (1), so it is actually illegal for a fiduciary advisor not to act in your best interest.
Now that you know what it is, how can you tell if an advisor is a fiduciary? By doing the following: Ask the advisor. In your first conversation, ask if he or she acts as a fiduciary in all the advice he or she gives. If the answer is evasive (or they say “only for some services”), treat it as a red flag.
Use public databases. The Investment Adviser Public Disclosure (IAPD) website is the official US database for RIAs and advisor representatives. Check there to see if a company or person is registered, what services they provide, whether there have been disciplinary events, and how they are compensated.
BrokerCheck. If your advisor also works as a broker (selling securities), review his or her licensing and employment history, complaints and violations through the Financial Industry Regulatory Authority (FINRA) BrokerCheck tool.
Ask to see the advisor’s Form ADV. This document should list fees, disputes, business practices, and other facts that would be important for you, as a customer, to know.
Be on the lookout for dual roles or “hat swaps.” Some advisors are “dual registered,” meaning they act as RIA fiduciaries and as brokers. When in broker mode, they may be held to a lower “best interest” standard rather than full fiduciary obligations. Ask when they act in each capacity and how they address any overlap.
Get a written commitment. A fiduciary must be willing to state the terms of the relationship in writing, acknowledging their duty, defining compensation, and disclosing any conflicts.
Please note that there are some limitations. Fiduciary duty covers advice and management, but does not extend to all financial decisions you make, such as purchases outside of your advisor’s recommendations.
Advisors may also differ in how they interpret what is considered a “material” conflict of interest, leading to variations in disclosure or client consent. That is why it is essential to have a clear agreement in writing.
And while fiduciaries must disclose conflicts, not all can be completely avoided.
Read more: Vanguard reveals what could happen to US stocks and is ringing alarm bells for retirees. Here’s why and how to protect yourself
Let’s say your brother-in-law is an advisor and you promised your sister you would use him.
He’s family, so you think everything should be in order, even if he’s not a trustee. But here’s what can technically happen if you decide to go to a non-fiduciary:
Incentive conflicts. You may be pushed to opt for proprietary or higher commission products even when there are better or cheaper alternatives.
Less transparency. Non-fiduciaries may not fully disclose how they are compensated or where there may be conflicts.
Suitability versus fiduciary. The fiduciary standard requires putting the client’s interests before suitability. The suitability rule basically says that an advisor only has to recommend something that fits your financial situation, objectives and needs. But it doesn’t require them to put your best interests first.
That means a broker could suggest an investment that will net you a big commission, as long as it technically ticks the right boxes for you.
Fragmented advice. Because non-fiduciaries often focus on selling products, your broader financial situation, such as taxes, estate planning, and insurance, can be affected.
If you’re looking for or working with a financial advisor, make fiduciary status a mandatory checkpoint. Ask the tough questions, check public records, get complete information and a written commitment, and be aware of any product conflicts.
You’ve worked hard for your money, and it’s important to make sure the people who care for you are working hard for you, too.
We rely only on verified sources and credible third-party reports. For more information, see our editorial guidelines and ethics.
United States Securities and Exchange Commission (SEC) (1).
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
