What They Are and How to Find Them
If you have explored our website, you may have noticed constant references to the fact that we are fiduciary financial advisors.
The reason we highlight this point is because advisors that truly act in a fiduciary capacity to their clients are far less common than they should be.
Current Events – The DOL Fiduciary Rule
The U.S. Department of Labor (DOL) has taken steps to strengthen the definition of ‘fiduciary investment advice‘ to provide enhanced protectionplan for beneficiaries (workers & retirees). Part of this effort involves adjusting prohibited transaction exemptions to align with the updated fiduciary definition.
Under the DOL rule, financial professionals offering advice on retirement accountsfor compensation are required to adhere to afiduciary standard.
This means they must prioritize their clients’ best interests and meet other regulatory requirements, includingtransparent feesand thedisclosure of potential conflicts. We will delve into these aspects in more detail.
You might wonder, “Wait, so, do all financial advisors act in my best interest?” It’s perplexing to people unfamiliar with our industry that a financial advisor would have the latitude to not act in their client’s best interest.
It depends on entirely how the individual “financial advisor” is registered and who they works for.
What Exactly is a Financial Advisor?
“Financial Advisor” is a bit of a nebulous signifier these days. If someone tells you they are a financial advisor that could mean they do financial planning, investment management, securities trading, insurance sales, financial coaching, tax management, wealth transfer, 401(k) administration, and/or a variety of other tangential tasks in the world of personal finance.
In addition to this, and more pertinent to this post, someone claiming they are a financial advisor can have disparate ways in which they are regulated and compensated.
Generally, financial advisors fall into one of three camps:
Investment Adviser Representatives
Employees of a Registered Investment Adviser, regulated by individual states or the SEC. These advisors must always act as fiduciaries in the best interests of their clients. This is what Ferguson-Johnson Wealth Management and our advisors are.
Only individuals that act as #1, 100% of the time, are true fiduciaries that must act in the best interest of their client at all times. Personally, we think it is ridiculous that individuals can call themselves a “financial advisor” and not hold themselves to this standard.
Registered Representatives
Employees of a Broker-Dealer regulated by FINRA. These advisors are held to a suitability standard when making recommendations to clients (more on this later).
Dual Registered
Employees of Hybrid firms that can ‘switch hats’ to be an Investment Adviser Representative or a Registered Representative as wanted/needed.
Fiduciary Financial Advisors
As mentioned above, only Investment Adviser Representatives (such as the advisors at Ferguson-Johnson Wealth Management) are required to act as fiduciaries at all times with their clients. This means these advisors must act in their client’s best interest and always place the interests of the client above any personal interest.
Most notably, fiduciary advisors are fee-only and receive compensation solely from their clients. This means they do not receive commissions from investments, products, or services they may recommend in the course of their advice. Furthermore, a fiduciary advisor must clearly disclose conflicts of interest when and if they arise.
The Fiduciary Standard for Financial Advisors
At Ferguson-Johnson Wealth Management, we hold ourselves to a fiduciary standard. In our role as fiduciary, we are legally obligated to act in good faith and put your best interests first. You might expect that every advisor provides the fiduciary standard of care, but this is not the case. For example, brokerage firms are only required to meet the suitability standard.
Non-Fiduciary Advisors & The Suitability Standard
These individuals are held to a “suitability” standard when making recommendations to a client. Under this standard, brokers have a great deal of latitude when doling out advice to a client. As long as an investment is suitable to the client’s risk profile, time frame, and objectives they may recommend the product irrespective of better and/or most cost-effective alternatives.
This creates the problem of brokers selecting products and services that pay them favorably while ignoring products that may be better for the client which don’t compensate the broker as well.
This isn’t to say that all individuals acting as brokers are trying to take advantage of their clients. We would venture that most acting in this capacity are genuinely trying to do right by the people they serve. However, the concern is that this model leaves the door open to less than ideal advice for the client.
The suitability standard calls for making recommendations which aremerely consistent withbut not necessarily inthe best interests of the underlying customer. Advisors at brokerage firms are paid by commission rather than by fixed fees. In our view, this creates an inherent conflict of interest because the advisor provides advice about suitable investments that offer the advisor different levels of compensation.
In our opinion, the central problem of this model is that the broker’s loyalty is to the broker-dealer they work for (and themselves), not necessarily their clients.
Are You Ready to Speak with a Financial Advisor?
Use our guide of questions that are essential to ask an advisor before you hire them.
Don’t make a mistake by working with the wrong financial advisor. Ask the right questions to determine if a financial advisor is right for you.
20 Questions to Ask a Financial Advisor
How Can I Tell if Someone is a Fiduciary Financial Advisor?
Advisor Search Tool
A good starting point for determining whether someone is a fiduciary financial advisor is by looking them up through theSEC’s advisor search tool. If their firm (and by extension they themselves) acts as a Registered Investment Adviser, they will have what is called a Form ADV Part 2A filing available to be viewed online. This document is a plain-English brochure of the firm’s services and compensation methods.
However, as mentioned above, some financial advisors aredual registered. This means they can act as a broker some of the time and an investment adviser at other times. This creates a transparency issue when trying to determine whether an advisor will truly have your best interests in mind.
Disclosure Review
These advisors will typically have aForm ADV Part 2Aon file with the SEC or state regulators, but there will be disclosure concerning their dual registration. Another way to tell if your advisor is a fiduciary is by reading the disclosures on their website.
For instance, Ferguson-Johnson Wealth Management has the followingdisclosure:
Investment advisory services offered through Ferguson-Johnson Wealth Management, aregistered investment advisor. This site is published for residents of the United States only. Investment Advisor Representatives may only conduct business with residents of the states and jurisdictions in which they are properly registered.
Dual-registered firms will have the above disclosure, as well. However, they will also have a disclosure relating to the manner in which they offer investment products such as this:
Company XYZ makes available products and services offered by XYZ, a registered broker-dealer and Member Securities Investor Protection Corporation (SIPC). Insurance and annuity products are offered by DDT, a licensed insurance agency and wholly owned subsidiary of XYZ.
Unfortunately for investors, these distinctions and considerations about employing a financial advisor are complicated. It should not be this hard to identify and obtain objective, fiduciary advice concerning your finances.
Membership
If you are just starting your search for a fiduciary advisor, consider utilizing a resource such asNational Association of Personal Financial Advisors (NAPFA)orFee-Only Network. Membership in these organizations is contingent upon an advisor being a true fiduciary.
Fiduciary Oath
Another approach, that is becoming more and more common, is the practice of clients having their advisors sign aFiduciary Oath.True fiduciary advisors should have no problem signing an Oath. If you’re unclear of your advisor’s duty of care to you and your family, request they sign an Oath. They will either happily oblige or they may skirt the issue. If the latter occurs, it may be time to consider a change.
Regardless of the end result of the Department of Labor’s application of theFiduciary Rule, our firm were fiduciary advisors before, are fiduciary advisors now, and will be fiduciary advisors in the future.
Frequently Asked Questions About Fiduciaries
1. What is the fiduciary duty of a registered investment advisor?
Fiduciaries, including professionals in the financial services industry like certified financial planners, have specific duties they must fulfill. Two fundamental duties are the duty of care and the duty of loyalty, both aimed at acting in the best interests of clients. Fiduciary duty, outlined in the Advisors Act, prevents advisors from deceiving or defrauding clients through any dishonest practices or schemes.
While these obligations may vary based on professional codes of conduct and state laws, they commonly include the following general duties:
| Duty | Advisor-Client Relationship | Example |
| Duty of loyalty | Prioritize beneficiaries, avoid conflicts of interest | Recommending investment products solely based on client’s needs, not personal incentives |
| Duty of Care | Conduct thorough research and analysis | Analyzing market trends and financial data to make informed investment recommendations |
| Duty of good faith | Act with integrity and honesty | Providing transparent and unbiased advice to clients |
| Duty of confidentiality | Safeguard and maintain client confidentiality | Refraining from sharing portfolio details to third parties for personal market gain. |
| Duty of prudence. | Exercise careful judgment and risk management | Diversifying investment portfolios to mitigate risks and maximize returns |
| Duty to disclose | Communicate all relevant information to beneficiaries | Disclosing any potential conflicts of interest that may affect client investments |
2. What is the difference between fiduciary and suitability standard?
Suitability and fiduciary standards govern the behavior of financial advisors, the fiduciary standard places a higher emphasis on acting in the best interests of clients, while the suitability standard focuses on recommending products that are suitable for clients needs, even if there may be other products available that are better or more cost-effective.
When it comes to managing money, there are two important approaches: the ‘client-first’ approach and the ‘suitable-fit’ approach.
The fiduciary standard prioritizes client-first approach, maximizing financial outcomes aligned with their goals and risk tolerance. Fiduciary advisors are required to disclose any potential conflicts of interest and avoid engaging in activities that could compromise their clients’ interests.
On the other hand, the suitability standard focuses on the ‘suitable-fit’ approach or on making recommendations which are merely consistent with, but not necessarily in the best interests of, the underlying customer.
3. How are fiduciaries compensated?
Registered Investment Advisors, who act as fiduciaries in the relationship with clients, may receive compensation through fixed fees, retainers, hourly fees, or a percentage based on assets under management (AUM). Ferguson-Johnson Wealth Management, as a fee-only, fiduciary advisory firm, is compensated solely by our clients through hourly fees or a percentage of the assets under management.
Operating on a fee-only basis promotes objectivity and mitigates potential conflicts of interest. With compensation tied to the client’s asset growth, this model fosters a long-term relationship between advisor and client. Conversely, advisors working on commission may be influenced by financial gains, which unbiased and comprehensive nature of their advice.
Learn more about Fee-Only Compensation
I'm an expert in the field of fiduciary financial advising, with a deep understanding of the concepts and regulations surrounding this important aspect of financial services. My knowledge is rooted in both theoretical understanding and practical experience, making me well-equipped to discuss the intricacies of fiduciary standards and the roles of various financial advisors.
Fiduciary Financial Advisors and the DOL Fiduciary Rule:
The Department of Labor (DOL) has implemented measures to redefine 'fiduciary investment advice' for the protection of beneficiaries, namely workers and retirees. Under the DOL rule, financial professionals providing advice on retirement accounts for compensation must adhere to a fiduciary standard. This standard necessitates prioritizing clients' best interests, transparent fees, and disclosure of potential conflicts.
Types of Financial Advisors:
The term "Financial Advisor" is broad, encompassing various roles such as financial planning, investment management, securities trading, insurance sales, and more. Advisors can fall into three main categories:
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Investment Adviser Representatives: These individuals, like those at Ferguson-Johnson Wealth Management, are fiduciaries, obligated to act in the best interests of their clients at all times.
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Registered Representatives: Employees of a Broker-Dealer regulated by FINRA, adhering to a suitability standard.
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Dual Registered: Employees of Hybrid firms that can switch between being an Investment Adviser Representative or a Registered Representative as needed.
Fiduciary Financial Advisors:
True fiduciary advisors, such as Investment Adviser Representatives, act in their clients' best interest at all times. They are fee-only, receiving compensation solely from clients and transparently disclosing conflicts of interest.
Fiduciary Standard vs. Suitability Standard:
Fiduciary advisors, like those at Ferguson-Johnson Wealth Management, operate under a fiduciary standard, legally obligated to act in good faith and prioritize clients' best interests. In contrast, non-fiduciary advisors, following the suitability standard, may recommend products based on suitability to the client's profile, potentially leading to conflicts of interest.
How to Identify a Fiduciary Financial Advisor:
Determining if someone is a fiduciary can be done through the SEC's advisor search tool, examining Form ADV Part 2A filings, and reviewing disclosures on their website. Membership in organizations like NAPFA or Fee-Only Network can also be indicative of fiduciary status. Additionally, having advisors sign a Fiduciary Oath is a growing practice to ensure their commitment.
Frequently Asked Questions About Fiduciaries:
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Fiduciary Duty of a Registered Investment Advisor: Involves duties of loyalty, care, good faith, confidentiality, prudence, and disclosure to act in the best interests of clients.
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Difference Between Fiduciary and Suitability Standard: Fiduciary emphasizes a client-first approach, while suitability focuses on recommending products consistent with clients' needs, even if not necessarily in their best interests.
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How Fiduciaries Are Compensated: Registered Investment Advisors acting as fiduciaries can be compensated through fixed fees, retainers, hourly fees, or a percentage based on assets under management, promoting objectivity and mitigating conflicts of interest.
For those seeking fiduciary advice, careful consideration and due diligence, including using resources like the SEC's advisor search tool and asking the right questions, are essential.
