If an "investment adviser" is registered with the SEC, is he/she a fiduciary?
I read that "investment advisers" that are registered with the SEC must meet the fiduciary standard. I also noticed that there are "investment advisers" who are registered as brokers with FINRA and are paid on commission. I am confused as to how a broker paid on commission can be an "investment adviser" that meets the fiduciary standard.
You’re definitely not alone in being confused on this topic. I’ll do my best to shed some light on it. I’ll start by saying there’s a basic difference between the suitability and fiduciary standards. A fiduciary is bound by law to act in your best interest. Believe it or not, this isn’t a requirement for most financial advisors. Reason being; if they sell commissionable products, the only obligation is to make sure that the product is suitable for the investor.
- Derives Compensation Solely from Commissions on Products Sold
- Adheres to the Suitability Standard Only
- Fee-Only Advisor
- Derives Compensation from Fees for Ongoing Investment Management & Advisory Services
- Required by Law to Act in the Clients Best Interest as a Fiduciary
- Fee-Based Advisor
- Derives Compensation from Both Commissions on Products Sold and Fees for Ongoing Investment Management & Advisory Services
- Adheres to the Suitability Standard When Selling Products and the Fiduciary Standard When Providing Ongoing Investment Management & Advisory Services
As fiduciaries, Fee-Only Registered Investment Advisors (whether registered with the SEC or their home state) receive zero commissions because the only product they have to sell is their expertise, something that is quantifiable and transparent, as opposed to sales commissions which are often wrapped into the complexities of a financial products expenses.
You accurately pointed out the dilemma that Fee-Based Advisors face. Namely, when is it appropriate to sell products to a client based on a standard of suitability, and when is it appropriate to provide advice as a fiduciary acting in their best interest? Many view this as a contradiction. Why wouldn’t someone want to act in my best interest all the time? It’s the critical question that should be asked of every financial professional you meet.
Financial professionals are always being mischaracterized partly due to an industry that intentionally blurs the lines. Most true Fee-Only Financial Advisors absolutely despise being inadvertently called Brokers, and Brokers often do little to clarify that they aren’t actually acting in a fiduciary capacity. I’m not sure if we’ll ever get away from blanket terminology, but I am sure that individual investors are better served when they’re empowered with the knowledge to make informed choices.
It's kind of confusing, but basically a "Registered Investment Advisor" is actually a firm and the individuals at the firm are "Investment Advisor Representatives". Registered Investment Advisors, as a firm, must adopt and abide by a code of ethics and their structure is typically that of a fiduciary.
In any event, you should be able to see in their Form ADV Part 2A how they're compensated for their services. This should also help you navigate any potential conflicts of interest.
Adam C. Harding, CFP
Being registered by the SEC does NOT make an advisor a fiduciary. It just means the person filled out the proper paperwork and took the required tests to become registered. You are right, being a commissioned salesperson of investment products makes it pretty hard to always put your clients' interests first. Not that it's impossible, but it can create a conflict of interest.
Ask any potential financial advisers directly, "Are you a fiduciary?" People ask me this all the time and I am glad they are becoming aware of the right questions to ask when interviewing an advisor.