Thursday, October 21, 2021

Caveat Emptor

Ask the CFP

“Fine feathers don’t make fine birds.” ~ Aesop (c. 620-560 BC)

Question: How do I know if I have a fiduciary relationship with my financial advisor?

Answer: The simplest way is to just ask. The concept is important and drawing more attention from consumers recently. It’s an important concept that’s drawing more attention and important to understand.

The term fiduciary became a buzz word in April 2016 as the Department of Labor (DOL) put focus on identifying the responsibilities of financial advisors. According to AARP (American Association of Retired Persons), 10,000 people each day are turning age sixty-five. This is a time of life when many rely on investments to provide cash flow. Understanding the relationship with your advisor can become increasingly significant at this time.  

A fiduciary, according to Investopedia, is someone who must put client’s interests ahead of their own. Most of us would automatically expect this, yet unfortunately it’s not always the case. Other examples of fiduciaries are Corporate Officers, Attorneys, and Trustees of Trusts. A fiduciary is held to a higher standard than a non-fiduciary.

In contrast, a non-fiduciary works for a firm or a broker-dealer and doesn’t necessarily have to work in the best interests of their clients. Brokers are required to meet a suitability standard which requires transactions to be appropriate. An example of a non-fiduciary relationship is a consumer and a shoe salesperson. The only requirement is to sell an appropriate shoe, not taking into consideration what a consumer needs or could afford. In this example, the sales person doesn’t need to know about lifestyle, goals, financial situation, or footwear needs. In my case, the shoe salesperson wouldn’t be interested in how many shoes are in my closet or under my desk for that matter. The salesperson’s intention is to provide a suitable pair of shoes. The salesperson may benefit from selling something that is more expensive, unnecessary, or that generates a lavish reward for them. A rational person would not expect them to put the consumers’ interests before the salesperson in a non-fiduciary relationship. In the investment world, a non-fiduciary standard only requires disclosure of material information, and to make recommendations consistent with the best interest of clients. The distinction between non-fiduciary and fiduciary requirements hinges on the expectations of the client and the intentions of the advisor. Non-fiduciaries serve the firm or broker-dealers they work for first, and are not required to put their clients’ interests ahead of their own. Suitability does require that transaction costs aren’t excessive, but brokers don’t have to disclose any potential conflicts of interest.

In contrast, the fiduciary standard, as outlined in The Investment Advisors Act of 1940, requires investment advisors to place clients’ interests ahead of their own. Fiduciaries could make recommendations that generate no compensation for themselves if it’s in your best interest. Fiduciaries have a “duty to care” obligation to clients that lasts longer than a buy or sell transaction. The fiduciary duty is the highest standard of care.

Another distinction between the fiduciary and non-fiduciary standard is whether a process is used and if there’s an ongoing dialogue or discussion. The more comprehensive approach means working together to establish goals, evaluate current situations, and gather relevant information. After processing the information, proposals are made, discussed, implemented, and continuously monitored.

Anyone can put up a shingle and call themselves a “Financial Planner.” In contrast, the CERTIFIED FINANCIAL PLANNER™ and CFP® certification trademarks can only be used by those who’ve met certification and renewal requirements of the CFP Board. These involve satisfactory completion of a rigorous educational criteria to develop practical and theoretical knowledge, a comprehensive exam, specific professional experience and background checks for integrity and ethics.

The financial services industry underwent a drastic change when the internet became commonplace. Online trading brought a newfound ease of access to the investment arena. Investors no longer needed a one-on-one relationship with a broker/dealer, often called stockbrokers, to trade or invest in financial markets. To remain relevant, many advisors made the commitment to further their education and become CFP® practitioners. The CFP Board has a Code of Ethics stating that a CFP® professional must act with honesty, integrity, competency, and diligence while acting in the client’s best interests and exercising due care. They’re also required to avoid or disclose and manage conflicts of interest, maintain confidentiality and protect the privacy of client information while acting in a manner that reflects positively on the financial planning profession and CFP® certification.

It’s also important to know how your financial advisor is paid. Typically, financial advice is paid in one of three ways; 1) commissions, 2) fee-only, or 3) combination of fees and commission. If the subject isn’t brought up, be sure to ask your advisor how they’re paid. Non-fiduciaries can be fee-based or commission based. Fee-only advisors don’t charge commissions with compensation based on a flat fee, hourly, per-service, or as a percentage of assets under management.

Fiduciaries are fee-only or fee/commission based. Many believe that fee-based arrangements lessen potential conflicts of interest that may arise in commission driven relationships.

This isn’t to say that advisors using non-fiduciary or suitability only standards are acting inappropriately. As in so many areas of life, communication and understanding are key. Investors are best served when they identify their expectations of a relationship with a financial advisor. Stay focused and plan according.

The opinions expressed are those of the writer, but not necessarily those of Raymond James and Associates, and subject to change at any time. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed.

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.”

This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email Website:


Leave a Reply

Your email address will not be published. Required fields are marked *