How can I verify that my advisor is a fiduciary?
How can I verify that my advisor is a fiduciary?
If your advisor is a fiduciary, he/she should be registered as an investment advisor with either the U.S. Securities and Exchange Commission (SEC) or with the state regulatory agency within the advisor's state. You can search the Investment Adviser database https://www.adviserinfo.sec.gov/ to view professional background and conduct, including current registrations, employment history, and disclosures about certain disciplinary events involving your advisor.
When you enter your advisor’s name in the database, if the summary result specifies that your advisor is only an “Investment Adviser Rep,” they are likely a fiduciary. If the summary result specifies “Broker,” they are most likely not a fiduciary. If the summary result specifies both “Investment Adviser Rep” and “Broker,” they are dual-registered and most likely a part-time fiduciary.
It’s important to read your advisor's Form ADV, the informational document that discloses details about your advisor’s business practices including compensation arrangements and potential conflicts of interest. If your advisor doesn't have a Form ADV, it's a good sign that they're not a fiduciary.
If you would like more assurance that your advisor is acting in your best interests, you can ask your advisor to sign a Fiduciary Oath (http://www.thefiduciarystandard.org/fiduciary-oath/) declaring their commitment to adhere to a fiduciary ethic and, in so doing, be accountable for the advice he/she provides to you.
Great question, and it's actually easy to figure out. You can look them up on FINRA's BrokerCheck website by going here. Put in their name and if under the name it says "B - Broker Regulated by FINRA" then they are held to suitability standards only. This means they can put their interest before yours as long as their recommendation is at least suitable to you. If it says "IA - Investment Advisor" then they are a fiduciary and must always do what is in your best interest. You will also some that say "PR - Previously Registered Broker" and that just means that they used to be a broker, but are either retired, no longer an advisor, or are now a fiduciary only.
Good luck to you, and please let me know if I can be of further help.
Matt Ahrens, CIMA®
It’s a bit easier than many think to determine if an advisor is a fiduciary.
Here are some ways you can answer this question.
Does the advisor hold any professional designations? CFAs are required to put a client’s interests first and act as fiduciaries. CPAs who work as financial advisors must also act as fiduciaries. CFPs are another group of financial professionals that have to act as fiduciaries.
You can also ask. No one would lie about it.
If the person works for a registered investment advisor, they are required to act as a fiduciary. You can also check their Form ADV Part 2, which is available on the SEC website. The advisor is also required to give you a copy of his/her ADV before you become a client.
You can also ask the advisor the following questions:
- How are you compensated?
- Do you work for a fee, a commission, or both?
- Do I pay you, or are you paid based upon what I invest my money in? For example, annuity, mutual fund, stock, bond, alternative investment.
- Are you a Registered Investment Advisor representative?
- What professional designations do you hold?
A fiduciary’s loyalty is to you, not a company. A fiduciary acts in your best interests, not theirs. A fiduciary should provide full disclosure of all fees and not to buy “financial product(s)” that are for their financial benefit rather than yours.
A fiduciary is paid directly by you. This can be by the hour, a flat fee, or an agreed upon percentage that is disclosed up front. This percentage is typically based upon your assets or your net worth. It is paid for managing your assets and may include providing a financial plan, financial advice, or a combination of any of these items.
Note that this is really a “yes” or “no” question. No long answers are required.
You can also look up the advisor on FINRA’s BrokerCheck website. After putting in their name, see if it says “B – Broker Regulated by FINRA,” it means they are only held to the lesser suitability standard (meaning they can put their interest ahead of yours if their recommendation is at least suitable for you. If it says “IA – Investment Advisor,” then the individual is a fiduciary who must always do what is in your best interest. If it says “PR – Previously Registered Broker,” they used to be a broker. Now they are either retired, no longer working as an advisor, or are now a fiduciary.
In today’s financial services industry the terminology is becoming ever more confusing.
Advisor, Broker, CFA, CFP, AAIM, CIMA, and don’t forget the VHS, BETA and DVD (ha, the last 3 were to see if you were paying attention.)
Now they throw in the word Fiduciary. I did some research and the word Fiduciary comes from an interesting place…….
Let’s go back in time. The fiduciary standard has its origins in the Middle Ages. When a knight would go off to war, he would transfer legal ownership of his property to a trusted friend. During the knight’s absence, the friend had legal ownership of the property, but beneficial ownership still belonged to the absent knight. The friend served as a fiduciary and was responsible for protecting the estate and acting in the knight’s best interest, knowing that the legal ownership would revert to the knight upon his return.
Fiduciary- Person given the power to act on behalf of another and put their interests first.
The Investment Advisors Act of 1940 is a law that was enacted in order to regulate advisors who, for compensation, give advice to others as to the value of securities or as to the advisability of investing in, purchasing or selling securities. The law establishes principles for how advisers should treat their clients, which courts have interpreted to be fiduciary obligations. The adviser, as a fiduciary, owes the client a duty of loyalty, which means they must act in the best interest of the client. If a conflict of interest exists, the adviser must make full and fair disclosure of all material facts so the client can make an informed decision whether to proceed with a transaction. Additionally, the adviser owes the client a duty of care, which means the adviser’s advice, based on a reasonable inquiry of the client’s financial situation, investment experience, and investment objectives, is in the client’s best interest.
In other words, according to the SEC rules and the Investment Adviser’s Act of 1940, the 5 responsibilities of a fiduciary are:
- Put clients’ interest first.
- Act with the utmost good faith
- Provide full and fair disclosure of all material facts
- Do not mislead clients.
- Expose all conflicts of interest.
To give you a simple answer you can ask them. Other helpful websites to check.