Here is my case about why an investment fiduciary advisor will not always meet your best interests. The meaning of fiduciary is a little more complicated than asking this simple question, “Are you a fiduciary?” I understand why someone would ask that question! But the meaning of fiduciary is a little more complicated than that simple question.
You may already know that many “so-called” financial advisors do not work in the interest of their clients (as a fiduciary always does). And many of those advisors are employed by companies with interests they are paid to uphold.
To make things worse, many people will simply refer to any financial professional as a financial advisor. Let’s start with discerning who is not a fiduciary, but more so a suitable registered representative, with fiduciary registrations.
What is a Suitable Registered Representative?
A Registered Representative, aka stockbroker or broker for short, buys and sells securities for their customers. Many of the things we purchase, i.e. cars, washing machines, etc., are paid through a commission. They are held to a suitability standard, which is less strict than the fiduciary standard. You can go to BrokerCheck to find out if someone is a Registered Representative.
Who is a Fiduciary Investment Advisor Representative?
By contrast, the term investment advisor (also spelled as “adviser” see below) is a legal term that refers to an individual or company. The individual or company is registered with either the Securities and Exchange Commission (SEC) or a state securities regulator. To find out if you are working with an actual investment adviser representative, go to the Securities Exchange Commission’s Investment Adviser Public Disclosure database.
Both representatives and investment adviser representatives may hold advanced designations that are not necessarily fiduciary. The Chartered Financial Analyst or CFA is considered the premier investment designation. That said, unless the Chartered Financial Analyst holds the Series 65 registration, they are not held to a fiduciary standard.
In the investment industry, a true fiduciary works in the best interests of their clients. The Centre for Fiduciary Excellence and the Center for Fiduciary Studies defines a fiduciary as “someone who is providing investment advice or managing the assets of another person and stands in a special relationship of trust, confidence, and/or legal responsibility.”
A fiduciary keeps the interests of their client ahead of their own
Passing the Series 65 Exam is not the end-all
At the most basic level, investment adviser (not advisor) representatives who pass the Uniform Investment Adviser Law Exam (Series 65 Exam), are held to this standard. These representatives work in firms called registered investment advisers. Thus, the firm is also a fiduciary.
I liken the Uniform Investment Adviser Law Exam registration to “just getting over the hurdle,” but not by much. Upon passing the Series 65 exam, an investment adviser representative does not have to earn continuing education credits to further their knowledge, such as the Certified Financial Planner designation. In these cases, those who seek that designation have done far more work than just “clearing the hurdle.”
The Uniform Investment Adviser Law Exam is an exam about law and not investing. While not required, some professionals may have a Finance degree, or have an investment designation, such as the Chartered Financial Analyst.
An impressive title like Vice President on a business card does not indicate investment knowledge. You may have heard the term assets under management or AUM. That is simply an indicator of the volume of money that the advisor or their firm is managing. But, that doesn’t indicate how a firm’s risk-adjusted returns are compared to other firms. More importantly, how effective is this advisory firm in providing clients with risk-adjusted returns appropriate for their goals?
Fortunately, FINRA has a page to help you learn more about Professional Designations. They even have a page for so-called “Accredited Designations.” There are now 11 designations certified by the American National Standards Institute or the National Commission for Certifying Agencies.
However, the Financial Industry Regulatory Authority does not endorse any designation. So you should do your own research to determine if a professional with or without designation fits your needs.
Dually Registered: Fiduciary and Non-Fiduciary Status
Some investment advisor representatives are also registered as “Registered Representatives.” So there is an argument for this dual registration, as it allows investment advisors to offer more options to clients and help smaller accounts. However, this also allows these advisors to go back and forth between fiduciary and non-fiduciary status. It gets confusing when the fiduciary light goes off and on!
This dual registration comes with the Registered Representative title. In this case, the registered representative aka financial advisor will most often sell a mutual fund, which includes an embedded commission. The discernment between “commission” and “fee” (which is more transparent) is the beginning of the confusion. An advisor’s fee is a cost for services rendered. But a commission is also a fee.
A Certified Financial Planner (CFP) fiduciary definition matters
A Certified Financial Planner (CFP) passes a 12-hour board exam and spends three years delivering financial planning services to clients BEFORE they can claim this designation. Depending upon the year they get this designation, they also have to hold an undergraduate degree.
With the CFP Certificate, an advisor must pass the board exam and qualifying tests, but also take 30 hours of continuing education every 2 years to improve their knowledge. The Certified Financial Planner® designation is the only accredited designation that some states view as satisfying their investment advisor representative requirements.
If your planner claims to be a CFP, you can (and should) verify that, along with determining if there are any blemishes on the person’s record. The Certified Financial Planner Board of Standards mandates that a CFP act as a fiduciary in all his or her dealings. That can help you navigate the potential conflicts that come from the blurring of lines I also noted earlier.
CFP® Pros pledge to honor Standards of Conduct, which states that when providing Financial Advice to a Client, a CFP® professional must act as a fiduciary, and therefore act in the best interests of the Client. A dually registered CFP® pledges to “Disclose And Manage Conflicts Of Interest.”
The Fiduciary Takeaway
What’s in a name? When it comes to the term financial advisor, we see there are many interpretations, as well as many regulations. It is best to clarify what registrations, licenses, and professional designations the financial professional, you hire, actually has in place. Ronald Reagan once said, Trust but verify!
That said, it is wise to check an advisor’s credentials every so often, as records can change.