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It’s a great song title, and blurred lines also describes what’s going on the world of financial advice. The term "fiduciary" is quickly becoming just a buzzword for financial advisors everywhere. The marketing department at a major bank has just decided to add the "fiduciary" label to its brokers’ job titles, effectively blurring the lines between stockbrokers who work on commission – both for themselves and their firms – and true fiduciaries, who rely on fees for offering retirement planning services.
To give you an idea of how much wirehouses generate in commissions and transaction fees, Bank of America raked in $5.7 billion in "trading" revenue, which DealBook explains represents how much the firm made purchasing securities and selling them to clients at higher prices. At the stockbroker level, a PayScale survey recently found that commissions make up the vast majority of brokers' total compensation.
Here’s the problem: the advisors working at banks and brokerage firms may offer fiduciary retirement advice and say they put your interests first, but the firms they work for (a.k.a., the biggest brand names on Wall Street) are not fiduciaries. Instead, they adhere to the lower suitability standard. It’s fiduciary advice, but "part-time" fiduciary behavior. Full-time fiduciary advisors must adhere to the fiduciary standard, which states that your interests come first all of the time. (For more, see Choosing a Financial Advisor: Suitability vs. Fiduciary Standards.)
Beware the 'Best Interest' Exemption
When you sign on with a new advisor, standard practice is for you to fill out a huge stack of paperwork. If the advisor is only a part-time fiduciary, the firm will ask you to sign what's called a Best Interest Contract (BIC) Exemption. It’s a contract, and the gist of the exemption says this: "I'm a fiduciary... except when I'm not." Do you really want to give your advisor an exemption from acting in your best interest?
When the investment firm holds itself to the higher fiduciary standard, legally, it must put your best interests ahead of its own financial interests. However, when the firm does not hold itself to this higher standard of service, then it basically means the individual advisor is an employee representing that firm, so it’s easy to see how loyalties can put you in third place rather than first.
The advisor's first allegiance is to his or her firm in order to stay employed. Advisors place themselves in second place because they make most of their income selling investments. Then comes you, the client, in third and last place.
The result: Sometimes advisors will adhere to the higher fiduciary standard. But when it is in their own best interests, they may switch hats and adhere to the lower suitability standard.
Learn to Recognize Hat Switchers
Here are three ways to find out who’s really a fiduciary advisor and who isn’t:
- If the firm they work for doesn’t practice as a fiduciary, advisors can still have the word "fiduciary" in their job title and – even be marketed as a fiduciary advisor – but in reality, not be one. If they work at a true fiduciary firm, there is no such thing as an exemption from putting a client’s best interests first.
- Advisors who are registered as fiduciaries with the SEC are not allowed to get out of their fiduciary responsibilities by having investors sign a piece of paper. Broker/dealer firms, on the other hand, can offer the Best Interest Contract Exemption to their advisors, enabling them to sometimes act as a fiduciary and sometimes not.
- Look up your advisor on BrokerCheck. If he’s listed as a “Broker,” he isn’t (always) a Fiduciary; if he is listed only as an “Investment Advisor,” he is most likely always a Fiduciary.
Investors can and should demand detailed information from their advisors to ensure complete transparency. “Investors need to exercise their power and insist on key terms. Insist, for example, an advisor put in writing that she is a fiduciary fulltime, what she earns from your account and how she manages conflicts. These are basics. Accept no less. Be ready to walk,” says Knut Rostad, president of the Institute for the Fiduciary Standard.
The Bottom Line
The new fiduciary rule for retirement advice is good for consumers because it’s forcing advisors and their firms to "pick a lane." Now consumers can do the same by deciding whether they want truly unbiased advice or just someone to execute transactions. Many consumers know they can save on expenses by using a discount broker when they want someone to execute a transaction without any advice, but brokers aren't always the cheaper option. In cases when you're not using a discount broker, they are usually more expensive.
This isn't to say that a fiduciary advisor’s fees are always lower than the commissions you’d pay to a non-fiduciary broker. In some cases, the ongoing advice fees a fiduciary advisor charges may be more than you want to pay, but full transparency is the only way to truly comparison shop. You should be able to see all the costs and whether the advice you are receiving is really unbiased. Only then can you determine whether you’re getting exactly what you need at a price you feel it's worth.
Let me be clear: There’s nothing wrong when advisors are paid commissions for selling you investments or executing transactions – provided that’s what you want. You might already be working with an advisor employed by a major Wall Street brokerage firm who offers experience and transparency, and you have nothing to complain about. Plenty of seasoned advisors are brokers who behave as fiduciaries even when no one’s looking. The problem is when people unknowingly choose an advisor they believe is offering objective investment advice when in fact they've got a salesperson. So go into meetings understanding the difference between a broker and a fiduciary and decide which fits your needs.
Pam Krueger is the founder of "WealthRamp," co-host of "MoneyTrack" on PBS and national spokesperson for The Institute for the Fiduciary Standard.