Sounds like that should apply to all financial advisors, right? Unfortunately, it does not.
Who Must Act In Your Best Interests?
Registered Investment Advisors (RIAs) must always adhere to a fiduciary standard; Certified Financial Planners (CFPs) must usually adhere, but many employ 'dual registration' as broker-dealers to skirt these requirements. The most common type of financial advisor—the registered broker-dealer—is completely excused.
A fiduciary is required to act in ways that are most beneficial to their clients, all the time and to the best of their abilities; everyone else is bound only by the 'suitability standard', which vaguely states that the financial products they recommend must be 'suitable'. This is because broker-dealers are actually salesmen, paid on commission by a bank, brokerage, or insurance company; those acting as fiduciaries, on the other hand, typically charge a fee for their advice and never receive a kickback for their recommendations.
If your investment charges fees above 0.50% per year or has any sort of sales load, you are getting ripped off.
Stay away from advertisements disguised as free advice—if they're not asking for money up-front, they're getting it from you somewhere else.
Our old friend John Bogle has fought tooth-and-nail for a broad, unified fiduciary standard for the financial services industry.
Ask Hard Questions
When shopping for a financial advisor, ask them the following questions:
- “In our interactions, will you be acting as a fiduciary? Will you be bound by fiduciary duty?”
- “What is your commission and recruitment structure? How are you compensated by the company you work for and by the companies whose products you recommend?”
Follow Your Gut
Broker-dealers pushing insurance products, such as annuities, generally have the most to gain from fees and commissions. They will often use hard-sell approaches, such as setting arbitrarily short deadlines, to create artificial urgency and pressure you into making a decision. They may also play up the work that they have done to prepare a policy in an effort to make you feel bad about turning down their offer. Don't be fooled by these unethical approaches.
Always fall back on these investment sanity checks:
- "Never invest in something you don't understand."
- "If it sounds too good to be true, it probably is."
If something fails these checks, get more information. Do your homework: watch out especially for fees and hidden risks.
If your interactions with your financial advisor make you feel uncomfortable, find a new advisor. Most people with straightforward finances who follow a simple index mutual fund investment strategy can confidently manage their investments themselves, only seeking out tax and regulatory advice from a professional as-needed.
Want to know more about fiduciary duty? Get educated and protect yourself:
Wikipedia: “Registered Investment Advisor (RIA): Fiduciary Standard vs Suitability”
Wikipedia: “Certified Financial Planner (CFP)”
"Institute For The Fiduciary Standard"
Forbes: "Investors Misled By Brokers Masquerading As Fiduciaries"
InvestmentNews: "John Bogle on fiduciary standard: ‘No man can have two masters'"
AdvisorOne: “Bogle: Fiduciary Duty Comes Down to ‘Simple Mathematics’ ”
WealthManagement: “The New Face of The Fiduciary”
BusinessWeek: "The Rise of the Registered Investment Adviser"
InvestmentNews: “FINRA postpones action on recruitment disclosure rule”