Is 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!

“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 in result of the new Department of Labor (DOL) ruling that 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.

What is a fiduciary and why is that important?

Having a fiduciary duty requires an investment adviser, by law, to act in the best interest of their clients, always putting their interests ahead of their own. Under the fiduciary duty, an investment adviser must provide advice and investment recommendations that he/she views as being the best for the client.

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 Adviser (fiduciary) under section 202 of the Investment Advisers 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 Advisers 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.

Therefore, 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 simply 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.

In these cases, brokers mask 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.

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 REIT’s, 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 adviser 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.  So 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.

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 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 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 be sold a product!

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


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