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IS YOUR FINANCIAL ADVISOR A FIDUCIARY?
Having a fiduciary duty requires an investment
advisor, by law, to act in the best interest of their
clients, always putting clients’ interests ahead of
their own.
In this brief special report you’ll learn more about
what a fiduciary is, why it’s important, and how to
know if your advisor is one.
by Keith Springer
“Are you a Fiduciary?” is probably the most-
asked question I get these days. I don’t mind
because my answer is easy: “Yes, absolutely!”
This question doesn’t surprise me all that much
because every investor should know whether
their financial guy is a fiduciary or not. The
question has been brought to the forefront as
a result of the new Department of Labor (DOL)
ruling that states everyone who works with
retirement accounts must be a fiduciary. I will
admit that I was shocked to learn that a large
number of so-called “financial advisors” are not
fiduciaries. I have been in this business for over
30 years and I just assumed all were. Surprise,
surprise, surprise!
So, if you are an investor be sure to ask if your
broker, financial advisor or qualified retirement
advisor is a Fiduciary or a Stockbroker.
01Is Your Financial Advisor a Fiduciary?
IF YOU HAVE A “FEE BASED” ACCOUNT AT MERRILL LYNCH, WELLS FARGO, FIDELITY, CHARLES SCHWAB, MORGAN STANLEY, TD AMERITRADE, EDWARD JONES OR ANY OTHER BROKERAGE FIRM – LARGE OR SMALL – YOUR ADVISOR IS PROBABLY NOT A FIDUCIARY!
What is a fiduciary and why is that
important?
Having a fiduciary duty requires an investment
advisor, by law, to act in the best interest of
their clients, always putting clients’ interests
ahead of their own. Under the fiduciary duty,
an investment advisor must provide advice
and investment recommendations that he/she
views as being the best for the client.
It seems to me that this should have always
been the standard of care. I couldn’t imagine
sitting across from a client and saying “No,
I am not required to put your interests first.”
Unfortunately, that’s exactly what many
advisors, particularly those who work for
a bank or brokerage firm or only hold an
insurance license, have to say when asked.
What is the difference between a fiduciary
and a stockbroker and why should I be
concerned?
A stockbroker is defined as any person engaged
in the business of effecting transactions,
whether they be buying, selling, or trading for
the account of others. Traditional stock brokers
have many different titles these days and some
can be a little confusing or misleading such
as: investment consultant, financial advisor,
financial consultant, registered rep or the now
popular wealth manager or wealth advisor.
Regardless of their title, stockbrokers
generally do not have a fiduciary duty to the
client. Brokers can skirt around the higher
legal standard of the fiduciary act due to an
exemption they have been allowed to get from
the definition of Investment Advisor (fiduciary)
under section 202 of the Investment Advisors
Act of 1940 which reads:
“Any broker or dealer whose performance of
such services is solely incidental to the conduct
of his business as a broker or dealer and who
receives no special compensation therefor.”
What this really means in plain English is that in
the eyes of the Investment Advisors Act of 1940,
brokers are not considered to be “fiduciaries”
because the services they provide are simply
incidental to the sale of the “products” they sell.
Therefore, they fall under what’s called the
“suitability doctrine,” which simply is a lower
standard of care that legally allows them to not
be obligated to put their client’s interests first.
This means any professional financial advisor
that is not a fiduciary is allowed to “sell” you
the proprietary product or investment that
pays them the highest commission, provided
it is deemed suitable. I have seen this many
times with the so called money management
programs offered by banks and brokerage firms
– Merrill Lynch, Wells Fargo, Fidelity, Charles
Schwab, Morgan Stanley, TD Ameritrade and
Edward Jones just to name a few.
What can be even more confusing is that dual
Registration is allowed. It is not uncommon
today for financial advisors to serve as both
investment advisors and brokers. According
to a FINRA study, 88% of investment advisor
representatives are also registered as brokers.
Although dual registration is legal, a clear
conflict of interest could exist. Advisors at
brokerage firms often sell clients their internal
money management programs or ‘fee-based
accounts,” which are often no more than
glorified mutual funds where you get to see the
individual stocks.
02Is Your Financial Advisor a Fiduciary?
...ANY PROFESSIONAL FINANCIAL ADVISOR THAT IS NOT A FIDUCIARY IS ALLOWED TO “SELL” YOU THE PROPRIETARY PRODUCT OR INVESTMENT THAT PAYS THEM THE HIGHEST COMMISSION...”
“
In these cases, brokers present themselves as
registered investment advisors, only to sell
this so-called “fee based account” or asset
management program, but provide little of
the necessary planning clients need, which
comes standard when working with a qualified
retirement advisor.
03Is Your Financial Advisor a Fiduciary?
Another tactic is for a brokerage firm advisor to
sell you a fee-based account where they act as
an “investment advisor,” while also opening a
separate account where they sell you products
such as REITs, bonds, or LP’s where they receive
a commission which you will probably never
see. Investors get the short end of the stick
here because dual advisors are only held to the
lower legal standard.
Insurance Licensing is also a common
misnomer. With this simple license, someone
can call themselves a financial planner. Of
course this fancy title does not make them a
fiduciary.
How can I tell if my advisor is a fiduciary or
a stockbroker?
Ask your current or prospective advisor if they
are “fee-based” or “fee-only.” Advisors who
are fee-only will be fiduciaries, as they cannot
collect commissions or mutual fund trails. Their
only source of revenue is the fee they charge
for planning, advice, investment management,
and asset protection.
Brokers on the other hand are primarily
commission-focused. Legally, they cannot hold
themselves out as fee-only. Fee-based can get a
little misleading with these people as they can
be dual registered and offer advisory accounts
as well as brokerage accounts; while they may
put on the advisory hat one day, the next day
they might put on the brokerage or insurance
agent hat to sell some limited partnerships or
annuities.
04Is Your Financial Advisor a Fiduciary?
Ask what licenses the advisor has. If they have a
series 7 license it means the advisor is registered
as a stockbroker. If they have a series 65 or 66,
they are registered as an investment advisor.
If they have both the series 7 and 65/66, they
have dual registration, thus creating a potential
conflict of interest as I previously discussed. I
gave up my series 7 license in 1998 in order to
become a Registered Investment Advisor and
thus a fiduciary.
If you are a client of a Wall Street Bank and/or
Brokerage firm, you probably became a client
because you were seeking advice. However,
you will very likely be exposed to significant
conflicts of interest. These firms are in the
business of selling products with their loyalty
given to their shareholders. Their focus is on
executing the transaction – even if it’s a fee-
based managed account – and not the advice.
To ensure that your interests are always put
first, work with a fee-only advisor who is
required to function as a fiduciary for their
clients. After all, you’re looking for investment
and retirement planning advice, not to be sold
a product!
For a free portfolio review or if you are
interested in a FREE customized Retirement
Income and Tax Strategy Analysis, simply
click on this link or give us a call for a no
obligation consultation today.
As always, please feel free to contact me.
Cheers – Keith
05Is Your Financial Advisor a Fiduciary?
ABOUT THE AUTHOR
Keith Springer is the author of Surfing the
Retirement Tsunami – Your Guide to
Staying Afloat and Retiring Comfortably”
and “Facing Goliath: How to Triumph in the
Dangerous Market Ahead” He is also the host
of “Smart Money with Keith Springer” on
NewsRadio 1530 KFBK. Keith can be seen on
CNBC, FOX Business, the Wall Street Journal,
Fortune, CNN Money, and other news outlets.
He’s the President and Founder of Springer
Financial Advisors in Sacramento, CA, an
SEC Registered Investment Advisory Firm
specializing in investment and retirement
planning. Keith has been providing professional
wealth management advice for over 30 years.
All content is original material, solely owned
and paid for by Springer Financial Advisors.
Keith can be reached at (916) 925-8900
Learn more at keithspringer.com
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