A Fiduciary is an advisor who is not only ethically required to do what is best for you, but legally required to put your interests before their own. Now you would think that every financial advisor would be a fiduciary, but that is not true. A large number of financial advisors as well as insurance agents are not fiduciaries. The advisors who are not fiduciaries have to only prove that the investment they are recommending is suitable for you. Ethically they are supposed to do what is best, but legally they only have to do what is suitable.
In order to be a fiduciary, one must be a Registered Investment Advisor, “an RIA”, or work under one as an Investment Advisor Representative, “an IAR”. These are advisors registered with the SEC or a state securities administrator. An advisor can also be dually registered under an RIA and with a Broker-Dealer. When an advisor is dually registered it means they can also offer commissionable products to their clients. Here is where it gets a bit tricky. The commission from some investment products can be quite high. The advisor still must do what is best, not just suitable, but it can introduce a conflict of interest.
A true RIA advisor will work as an advice-only or fee-only advisor and not sell commissionable products, avoiding any conflict of interests. Roughly 33,000 out of 312,000 advisors in the United states are RIA/IARs. Of those, only 13,000 advisors can call themselves a true RIA/IAR. About 20,000 of those are dually registered.
I’ve been a fiduciary for the past 26 years but 24 of those years I was dually registered. When I sold my financial planning practice back in 2017, I kept my series 65 license which allowed me to work as an IAR, and dropped my series 7 which required me to be dually licensed. This allowed me to keep doing what I love: advising and educating.
Over the past two years, I’ve been coaching folks across the country through an advice-only model and do not sell any products. Thus, I eliminated the conflict of interest of being a dually licensed advisor.
In 2020 a new SEC rule, “Regulation Best Interest Rule” will be taking effect. It will require broker-dealers, thus the advisors under them, to adhere to a higher standard and do what’s in the best interest of the client. Now like anything new presented by government agencies, the rule seems to be as clear as mud as well as a bit watered down. However, it’s a start in the right direction to eliminating the conflicts of interests and holding investment advisors who are not currently fiduciaries to a higher level of accountability.
How do you know if your financial advisor is a fiduciary? Ask them and if they say yes, then ask if they are a dually registered fiduciary? If they again answer yes, then they call sell you commissionable products and a conflict of interest might exist. If your advisor is strictly an RIA, then you know that they are truly a fiduciary without the chance of conflicts of interests.
On a side note, if your financial advisor holds a CFP (Certified Financial Planning) designation, then they are held to fiduciary standard by the CFP board. My understanding is that those standards are tightening up as well once the “best interest rule” is released later in 2020.
Hopefully this clears up for you who and what is a fiduciary. There will be changes coming in 2020 that will further define who can call themselves a fiduciary.
Live free my friends,