Simply put, a fiduciary is someone who has a legal obligation to put your interest ahead of their own. A fiduciary financial advisor is a financial advisor who is legally obligated to act in your best interest when providing financial advice. Now, if you are like most individuals, you are probably thinking “That makes a lot of sense. Don’t all advisors make recommendations in my best interest?” Sadly, the answer is… no, not at all.
Something that began to gain a lot of notoriety in the financial industry in the past few years has been the term fiduciary and what it means for advisors and their clients. In 2016, the Department of Labor tried to put in place a Fiduciary Rule. Ultimately, this rule was struck down by an appeals court, but the effects of its message continue to live on. One of the main effects of this rule that continues to live on was the divide between a fiduciary advisor and a non-fiduciary advisor.
Many financial advisors are not fiduciaries. Non-fiduciary advisors are held to a lower standard, the suitability standard. Suitability is a standard in which the advisor only needs to believe that a recommendation is merely suitable based on a client’s financial situation, not in their best interest. Again, if you are like most clients you may be thinking, “I want to do what is best for me, not something that is merely suitable. Why would my advisor recommend something that is suitable and not in my best interest?”
Often, the difference between suitable and your best interest for a non-fiduciary advisor is decided by how much the advisor can make. Consider a client and an advisor weighing two similar investments, one of which pays a higher commission than the other. A fiduciary would be legally bound to recommend the one with lower fees, avoiding the higher commissioned product. A nonfiduciary advisor doesn’t have too. A non-fiduciary advisor can recommend an investment or a product that pays them higher fees even though a less expensive option may exist. That is a massive conflict of interest. Suitability does not require an advisor to place your interest of their own, nor does it require the advisor to avoid such conflicts. Only fiduciary advisors are required to fully disclose all material information and avoid conflicts of interest.
Not all non-fiduciary advisors are bad guys that are out to charge you as much as possible, but it is important to understand, they are legally allowed to do so, and some do. At CPS Investment Advisors, we are fiduciary financial advisors. We do not use any investment products that charge commissions, we only charge a single transparent fee for management. When evaluating potential advisors ask them if they are a fiduciary. If the answer is anything other than yes, or if the advisor says, “We are fiduciary-like”, then run away. You expect your doctor to make recommendations with your best interest at heart, so why don’t you expect the same from your financial advisor?
Michael Scott | MBA, CFA
Senior Portfolio Analyst