They May Not All Be, But Your Financial Advisor Should Be a Fiduciary

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dol_logoRight now, there is a big debate in Congress about whether the fiduciary standard should be required for all financial advisors that manage retirement accounts. A fiduciary requirement would include the following:

  • They must exercise best efforts to act in the best interests of the client.
  • They must provide disclosure of any conflicts of interest.
  • They must clearly explain how they make their money (upfront fees, asset-based fees, commissions, etc.)

Most people probably think “Wait, don’t they do this already”? Nope. Even so, many still violate the current lower standards! Barry Ritholtz has some scary numbers in his Bloomberg article Brokers Behaving Badly:

  • 1 in 13 brokers have committed misconduct that resulted in disciplinary action.
  • Half of those brokers are fired, but nearly half simply move on to work for another firm within a year.
  • About a third of brokers are repeat offenders (multiple events of misconduct).

(Use the FINRA Broker Check tool to look up regulatory actions, violations or complaints for a specific person or firm.)

The worst part is that much of the financial industry continues to fight against the fiduciary standard. Even popular “guru” Dave Ramsey opposes the fiduciary proposal, and has been called out on Twitter for it. They claim it will “limit middle-class access to financial advice”, which roughly translates in my mind to “if we can no longer suck huge 8% commissions from small accounts, then we might not bother anymore”.

I enjoy managing my own investments. I also believe that hiring a good financial advisor would work well for many people. A “good” financial advisor needs to have hard knowledge, soft communication skills, and the proper alignment of interests.

Whoever wins this political fight, you as an individual still have the right to demand that your financial advisor be a fiduciary. Those letters after people’s name don’t all have the same value. Certain designations like Registered Investment Advisor (RIA) include a fiduciary standard component. You may also show them this Fiduciary Pledge and see how they respond. Being a fiduciary alone is not enough to find an appropriate advisor, but it does serve as a very simple and basic filter.

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Comments

  1. When you purchase a mutual fund, you have a de facto financial advisor, the person or team who is managing the assets in that fund. An index fund probably doesn’t act in the best interest of the purchaser, but rather tries to match the market. However a target retirement date fund seems like it should match the interests of the group of people who want to retire near that year. Are there any regulations around how these are managed? It seems where they make their money is obviously the expense ratio. Is there any way to determine that they have no conflict of interest with the assets they select, or that they are acting in the best interest of their clients?

  2. I can enjoy the Ramsey show in doses, though after a while the tough-love approach of sanctimoniously attacking callers who obviously don’t have it together seems unproductive. I’d have to say his opposition to having fiduciary rules in place probably stems from his financial interests in the endorsed local provider network that he pushes. He probably doesn’t want to blowback it would cause to his reputation or to his fiscal interest if any or many of the providers in his network turn out to be acting in their own interests and not those of his clients.

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