How to Tell Whether or Not Your Investment Advisor is a Fiduciary

If you have one or more investment accounts, you likely work with an investment adviser. Investment advisers should act as a fiduciary to their clients. This means they are under obligation to act in their client’s best interest. This standard seems to make sense when you consider you are trusting someone to invest your hard earned funds for you. However, there is a current debate whether or not the fiduciary standard currently applied to investment advisers should be extended to other types of advisors. But the underlying issue for investors themselves is a two-pronged one: what is an investment fiduciary, and what standard does (s)he operate under as opposed to non-fiduciary advisors?

Ever since the enactment of the Investment Advisers Act of 1940, Registered Investment Advisers (spelled with an “e”) have been required to operate under the fiduciary standard. Other advisors (spelled with an “o”), including financial planners, broker-dealers, etc., operate under the much lower suitability standard instead.

Fiduciary Standard

If your investment professional is a fiduciary, (s)he owes you a duty of care that includes constantly monitoring your overall financial picture as well as your investments. (S)he must always put your interests first, not his or her own. One way to tell if (s)he is a fiduciary is if (s)he can buy and sell securities for you without getting your permission to make each unique transaction.

The fiduciary standard requires a professional to operate as follows:

  • (S)he must give you his or her complete loyalty.
  • (S)he must not use your money for his or her own benefit.
  • (S)he must provide you with full information of material facts that a reasonable investor would consider important.
  • (S)he must never mislead you.
  • (S)he must avoid all conflicts of interest.
  • (S)he must discuss with you any investment recommendation (s)he makes.
  • (S)he must charge you reasonable fees as set by the industry.

Suitability Standard

Most investors believe that all investment professionals operate this way. Unfortunately, such is not the case. The suitability standard under which many advisors operate allows them to sell you financial products for which they receive commissions. As long as the investments they recommend are “suitable” for you, they can recommend only high-commission investments with impunity.

The Current Debate

The fiduciary/non-fiduciary issue gained momentum in recent years, particularly after the Department of Labor instituted a new rule in 2015 that extended fiduciary status to investment professionals dealing with IRAs, 401(k)s and other tax-advantaged retirement accounts. The Fifth Circuit struck this rule down last year in a lawsuit brought by the U.S. Chamber of Commerce and others against the DoL

Since then, numerous others have proposed other rules. For instance, the Securities and Exchange Commission has proposed a “Regulation Best Interest” rule. Since it is not yet finalized, however, no one knows exactly what it entails.

Meanwhile, the debate continues, and not surprisingly, investment advisers are weighing in on the proposed changes. Those who argue for an extension of the fiduciary standard to virtually all investment professionals insist that this would save investors millions of dollars each year. Opponents, on the other hand, say that such an extension would put reliable investment advice out of reach for the typical mom-and-dad investor.

One thing on which everyone seems to agree is that investors themselves need to determine whether or not their current or potential investment professional is a fiduciary. Investors need to ask tough questions such as these:

  • Are you a fiduciary?
  • How are you paid?
  • Do you receive commissions?
  • Do you receive additional compensation above and beyond what I pay you?
  • Do you give me advice only or do you sell me financial products?
  • Has any professional or regulatory organization ever disciplined you?

If your adviser/advisor fails to give you adequate answers or if (s)he gives evasive answers, you may want to consider changing who you deal with. Even if (s)he assures you that (s)he is indeed a fiduciary, don’t simply take his or her word. Ask her to put it in writing for you and also to show you proof.

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