In light of recent changes in the financial services industry, many consumers are wondering if their financial adviser is a fiduciary. Allow me to point out the differences between an investment adviser performing to the fiduciary standard and other advisers adhering to the suitability standard.
The Fiduciary Duty
Seeking out an investment adviser who will act as your fiduciary can help eliminate many of the problems associated with working with someone who may be oriented toward commissions and making sales bringing about a conflict of interest. Fiduciary care embodies the highest standard of excellence and requires six core duties. Be sure that your adviser performs those duties, as outlined in the following:
1. Serve the client's best interest first, last and always. When your adviser makes a recommendation, it means that a superior option is not available.
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2. Act in utmost good faith by adopting the client goals as the adviser goals. You and your adviser should clearly communicate with each other, both orally and in writing.
3. Act prudently, with the care, skill and judgment of a professional. You should make sure your adviser is maintaining continual education and the skills required to properly advise you.
4. Avoid and manage conflicts of interest. If a conflict exists, your adviser should disclose the conflict and explain how it will be managed to your benefit.
5. Fully disclose all material facts. Your adviser should provide you with a statement of fees and investment expenses. If a third payment exists to the adviser, firm or anyone associated to the recommendation he or she has given you, a full disclosure should be made.
6. Control investment expenses through analysis of peer group rankings and making certain investment expenses are reasonable. Be sure your adviser is not charging you exorbitant fees.
The Suitability Standard
In contrast, a stockbroker is any person engaged in the business of effecting transactions for the account of others. When the broker recommends to buy or sell a particular security, he or she must have a reasonable basis for believing that the recommendation is suitable for you. In making the assessment, your broker must consider your income and net worth, investment objectives, risk tolerance and other security holdings.
Brokers may go by different titles, such as wealth managers, wealth advisers or financial advisers. Regardless of their titles, stockbrokers are generally not considered to have a fiduciary duty to the client. Instead of being obligated to put their clients' interests ahead of their own, brokers are only expected to deal fairly with their clients and provide suitable options.
How do you know if you are working with an advisory applying the fiduciary standard or an adviser applying the suitability standard? Ask the adviser what standard they are performing to and if they provide a signed pledged attesting that they do in fact perform to the six core duties. It's the best way to ensure you're getting the best advice available.
Con Reha is president of Lincoln, Neb.,-based Liberty Advisers. Over a 45-year career, he has helped many individuals, families and small business owners with successful personal financial planning.
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