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.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.
-
Ask the Editor — Tax Questions on Inherited IRAsAsk the Editor In this week's Ask the Editor Q&A, we answer tax questions from readers on the rules on inheriting IRAs.
-
I Asked Experts When It's Worth Splurging on Beauty and Skincare — and When You Can SaveSmart Shopping Experts agree that while you don't have to spend three figures on your products, some higher-priced items have value.
-
Retiring Early? This Strategy Cuts Your Income Tax to ZeroWhen retiring early, married couples can use this little-known (and legitimate) strategy to take a six-figure income every year — tax-free.
-
Ditch the Golf Shoes: Your Retirement Needs a Side GigA side gig in retirement can help combat boredom, loneliness and the threat of inflation eroding your savings. And the earlier you start planning, the better.
-
Roth IRA Conversions in the Summer? Why Now May Be the Sweet SpotConverting now would enable you to spread a possible tax hit over more than one payment while reducing future taxes.
-
A Financial Expert's Three Steps to Becoming Debt-Free (Even in This Economy)If debt has you spiraling, now is the time to take a few common-sense steps to help knock it down and get it under control.
-
I'm an Insurance Expert: This Is How Your Insurance Protects You While You're on VacationHere are three key things to consider about your insurance (auto, property and health) when traveling within the U.S., including coverage for rental cars, personal belongings and medical emergencies.
-
Investing Professionals Agree: Discipline Beats Drama Right NowBig portfolio adjustments can do more harm than good. Financial experts suggest making thoughtful, strategic moves that fit your long-term goals.
-
'Doing Something' Because of Volatility Can Hurt You: Portfolio Manager Recommends Doing This InsteadYes, it's hard, but if you tune out the siren song of high-flying sectors, resist acting on impulse and focus on your goals, you and your portfolio could be much better off.
-
Social Security's First Beneficiary Lived to Be 100: Will You?Ida May Fuller, Social Security's first beneficiary, retired in 1939 and died in 1975. Today, we should all be planning for a retirement that's as long as Ida's.
