As you look for an advisor in the Nashville or Atlanta area, there are many financial advisors to choose from. When you’re deciding on a financial advisor to guide you on decisions regarding retirement and investments, you should have a lot of questions prepared. You should inquire about the experience, whether the advisor works as a team or is a jack-of-all trades, whether the advisor advises on taxes, and whether the advisor addresses your financial issues in a holistic manner and doesn't just focus on investments. One of the most important questions to ask, however, is whether the advisor is a fiduciary. You might assume that a financial advisor always has the best interests of the client at heart. That, unfortunately, is not always true, and it is at the heart of the fiduciary rule.
What is a Fiduciary?
When a person or organization acts as a fiduciary, they are ethically bound to act in the best interests of the party whose assets they are managing. Such assets are managed to benefit their owner, not for the profit of the manager. There should also be no conflict of interest between the fiduciary and the owner of the managed assets. Fee-only investment advisors are regulated either by the state (e.g., Tennessee, Georgia) or the Securities and Exchange Commission (SEC). A fiduciary has the duty of “loyalty and care,” which is another way of stating that the client’s interests are always put above their own.
Broker-dealers, on the other hand, operate differently. Many refer to broker-dealers as mere sales representatives, and while they must make “suitable” recommendations to clients, their primary loyalty is to the brokerage for which they work, not necessarily the client. They may also paid by commission, rather than the flat fee charged by fiduciaries. While there are plenty of honest broker-dealers in the business and many quite savvy, the conflict exists when an "advisor" will get paid more by recommending one product over the other. While steering a client toward a higher costing fund isn't necessarily wrong, the reasons for putting the client in the fund should not be due to financial gain. Unfortunately, this will not always be the case.
What is the Fiduciary Rule?
A fiduciary rule regarding full transparency has long been a practice of many financial planners and advisors, and in 2015 the Obama administration wanted to initiate investor reform via such a regulation. As proposed, the fiduciary rule would require all financial firms to act as fiduciaries when dealing with clients’ retirement accounts. Firms that failed to so could face class-action lawsuits.
The U.S. Department of Labor (DOL) was supposed to begin phasing in the rule as of April 2017, but the Trump administration had issued a memorandum in February 2017 which delayed the rule’s implementation by six months. In June 2018, the U.S. Fifth Circuit Court of Appeals upheld an earlier decision to strike down the DOL’s fiduciary rule. The court’s majority found that the DOL exceeded its authority when promulgating the rule.
There are some states that are reviewing the options to establish a fiduciary rule for all. In the primary states that Oasis Wealth Planning serves - Tennessee, Georgia, and Florida - there is no such push. In the states where there has been proposed legislation to mandate the fiduciary rule, it is generally met with backlash from the broker-dealer industry.
While the fiduciary rule is dead on the federal level and most states for now, that does not mean it isn’t available for consumers. Indeed, consumers can choose a fiduciary advisor -- they just need to get something in writing stating that the advisor acts as a fiduciary.
Fiduciary vs. Salesperson: What's In a Name
Many people think their financial advisors are fiduciaries, but that’s often not the case. As noted, some financial advisors are essentially salespeople, not fiduciaries, and are more interested in selling a product than necessarily looking out for the client’s best interest. It’s one thing if a client understands a particular advisor is basically a salesperson, but if they don’t, the financial planner can take advantage of them. While I do generally like the idea of giving consumer choices and do not necessarily agree with all of my fee-only advisor brethren that the fiduciary should apply to all, I do think state and federal law should prohibit the use of a title that is not clear. If someone can get paid a commission and if their own compliance department has language in the documents telling consumers (in small print) that the "advisor" cannot give advice, they should arguably not be allowed to use the term "advisor" in their title. I am for a title more fitting to their duty, e.g., "Financial Representative", "Financial Broker", or "Financial Salesperson".
Asking the Fiduciary Question
When interviewing a financial advisor, inquiring whether they are a fiduciary should prove one of the initial questions. If the advisor responds affirmatively, ask them to put it in writing. You should also ask how they are paid since the answer will tell you whether or not they are a fiduciary. In many cases, you are entrusting your life savings to this advisor. You have the right to decide the type of advisor you want. A fiduciary may not always be the right fit, but the manner of compensation will likely go into the calculus of deciding whether to hire a broker or a fee-only financial advisor.
This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.