Are financial advisors fiduciaries – all, or just some of them?
The question of if financial advisors are fiduciaries can be confusing. In this article, we will clearly discuss the different types of financial advisors, define what a fiduciary is, and clarify which advisors within the industry fit into this category.
What is a financial advisor?
A financial advisor is a professional who renders guidance which may include, but is not necessarily limited to financial planning, investment management, or tax advisory. There are all types of wealth managers; some focus on clients of a particular type, such as retired people, doctors, business owners, etc. Others work with clients in particular locations, such as being a financial advisor serving Philadelphia-area clientele.
However, the biggest distinction drawn between financial advisors is regarding the way they are compensated. How a financial advisor gets paid has many implications for the experience the client has, from how the services are delivered to the fees they are charged and the standard of care the advisor is required to follow.
How financial advisors are paid (in a nutshell)
The simplest way to explain how a financial advisor gets paid is to imagine the entire universe of financial advisors as falling into one of three buckets: fee-only, fee-based, or commission only.
Fee-only
Fee-only advisors most commonly get paid an ongoing fee that is a certain percentage of the assets they manage. As the relationship is ongoing, the advisor’s interests are aligned with those of the client.
A wealth manager who works at a Registered Investment Advisor, or RIA, firm, is a fee-only advisor. RIA firms are regulated by the Investment Advisors Act of 1940.
Other types of fee-only advisors work for hourly fees or a flat fee. Although these models are less popular, they have gained more traction in recent years.
Commission-only
The stock brokers of yore are a typical example of a commission-only financial advisor. They are paid a commission for recommendations they make, and are not held accountable for making sure that these recommendations put their client’s interest before their own.
Stocks brokers are regulated by FINRA.
Financial advisors that are paid sheerly through commissions have become less popular in recent times.
Fee-based
If a financial advisor is fee-based, they wear two hats. They may either service you on a fee-only basis, or on a commission basis. The client is given a choice of how they would like to work with the advisor.
These wealth managers are commonly referred to as “hybrid financial advisors.”
Are all financial advisors fiduciaries?
Let’s first start with the definition of what a fiduciary financial advisor is.
A financial advisor is a fiduciary if they:
- Follow the fiduciary standard 100% of the time with no exception
- Follow a written code of ethics
- Are obligated to put the client’s best interest first 100% of the time
- Must fully disclose all conflicts-of-interest
- Must make every attempt to reduce all possible conflicts-of-interest
A fiduciary is not the same thing as a financial advisor.
A fiduciary financial advisor is not someone who:
- Is not required to follow the fiduciary rule 100% of the time
- Charges commissions even a small percentage of the time
- Is not obligated to put the client’s interest before their own 100% of the time
- Does not need to disclose or reduce all possible conflicts-of-interest
Not all financial advisors are fiduciaries. Some advisors follow the suitability standard of care, which is not as stringent and does not protect clients as well. It is a good idea to become aware of the differences between fiduciary and suitability standards.
As financial advisors are not required to be fiduciaries depending upon the standard of care they follow, how do you know if the one you are dealing with is, or not?
It can be very confusing.
So…which financial advisors are fiduciaries, and which aren’t?
This question is best answered by using a chart. Here is the clearest way we can express it.
| % of time must follow fiduciary standard | Regulated under the Investment Advisors Act of 1940 | Is a fiduciary or not? | |
|---|---|---|---|
| Fee-only | 100% | 100% | Yes |
| Fee-based | <100% | <100% | No |
| Commission-only | 0% | 0% | No |
The key takeaway for the question of financial advisor vs. fiduciary from this chart is that there are no “part-time fiduciaries.” If a financial advisor earns one single commission a year, they are still not a fiduciary.
Only fee-only advisors who work at RIA firms and are regulated by the Investment Advisors Act of 1940 for 100% of the time they are working with clients may be considered fiduciaries.
Whether or not your financial advisor is a fiduciary or not matters in terms of how fairly you will be treated. How you do you know if your financial advisor is a fiduciary? You should ask this question to whoever you are dealing with, and get the response in writing.
Concluding thoughts
Should you work with a fiduciary financial advisor?
We tend to say “yes”, because we believe this is the model that works best for clients. Unfortunately though, fiduciaries are only a portion of all financial advisory firms.
We are a fiduciary financial advisor in the Philadelphia area, but we work with clients across the country. We provide fee-only, objective advice to our clients. If you would like to discuss a possible relationship, contact us.