By
Karen Hube
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Advisors can have any number of qualifications, but only one indicates a superior level of dedication to clients’ needs: a commitment to the fiduciary standard.
A fiduciary is an individual or company obligated to adhere to the highest ethical standards, putting clients’ interests before their own.
Fiduciaries’ responsibilities are to act in clients’ best interest at all times, provide clear and timely reports, disclose any conflicts of interest, execute orders promptly, and charge reasonable fees.
It’s a confusing landscape. What’s potentially confusing to investors is that the title “advisor” isn’t synonymous with fiduciary. The title is used broadly by brokers and other financial professionals, whether they are fiduciaries or not.
Also confusing: A relatively new Securities and Exchange Commission regulation requires brokers to act in clients’ best interest, even though it does not hold them to a true fiduciary standard of care.
The only type of advisor legally bound to behave as a fiduciary is a registered investment advisor (RIA). RIAs must register either with a state securities agency or the SEC, depending on the size of their assets under management.
But even with RIAs, there are nuances to how the fiduciary designation applies. The SEC only requires that RIAs behave as fiduciaries when it comes to investments, not other aspects of financial planning.
Advisors with a CFP designation from the Certified Financial Planner Board of Standards agree to a fiduciary standard under certification requirements. The standard is broader than for RIAs, applying to all CFP services, but it isn’t legally enforced.
“Where things get more confusing is when the same investment representative is sometimes a fiduciary and sometimes a broker,” says Knut Rostad, president of the Institute for the Fiduciary Standard. He points out that dual registrations, allowing an advisor to wear the hats of RIA and broker, have been on the rise in recent years.
Payment structures can be revealing. Fiduciary advisors generally charge an annual fee—which removes the incentive to sell one product over another. Nonfiduciaries usually get paid commissions per transaction.
But this isn’t a hard-and-fast rule, Knut says. Nonfiduciaries can charge a fee and fiduciaries can collect a commission.
Not everyone needs a fiduciary. While the fiduciary designation is a good sign of an advisor’s good intentions, many nonfiduciaries have long and trusting relationships with clients and may be a better fit for your financial needs.
Fiduciaries typically charge a percentage of assets annually. Clients with straightforward circ*mstances may be satisfied—and pay less over time—with commission-based services.
Fiduciary advisors evolved recently. The fact that not all advisors are required to put clients’ interests first may come as a surprise, but the widespread prevalence of fiduciary advisors is a fairly recent development. Prior to the mid-1990s, brokers provided most financial services for individuals.
Gradually, some financial professionals sought to distinguish themselves from the transaction-based model and establish long-term trusted advisory relationships with clients. Many replaced the commission-based payment models with fees to avoid conflicts of interest and became agnostic about what investments or financial solutions they recommended.
The value proposition of the fee-based full-service financial advisory model resonated with investors and prompted many advisors to further distinguish themselves with a commitment to the fiduciary standard.
Write to advisor.editors@barrons.com
As an expert in financial services and fiduciary standards, my comprehensive understanding of the intricacies involved in financial advisory roles positions me to provide valuable insights into the concepts discussed in the article by Karen Hube. My experience and knowledge in the field enable me to shed light on the various nuances and distinctions related to fiduciary responsibilities.
The term "fiduciary" is central to the article, referring to an individual or company bound by the highest ethical standards, prioritizing clients' interests over their own. This commitment involves a range of responsibilities, including acting in clients' best interests, offering transparent and timely reports, disclosing conflicts of interest, executing orders promptly, and charging reasonable fees.
One key point of confusion, as highlighted in the article, is that the title "advisor" doesn't necessarily imply adherence to the fiduciary standard. Brokers and other financial professionals often use this title, whether or not they operate as fiduciaries. The Securities and Exchange Commission (SEC) regulation adds another layer of complexity by requiring brokers to act in clients' best interests without imposing a true fiduciary standard of care.
The article further distinguishes registered investment advisors (RIAs) as the only type of advisor legally bound to behave as fiduciaries. RIAs must register with either a state securities agency or the SEC, depending on their assets under management. However, even within this category, nuances exist, with the SEC mandating fiduciary behavior specifically in investments, not across all aspects of financial planning.
A notable mention in the article is the Certified Financial Planner (CFP) designation from the Certified Financial Planner Board of Standards. Advisors with a CFP designation commit to a fiduciary standard under certification requirements, which extends beyond the scope of RIAs but lacks legal enforcement.
The rise of dual registrations, where an advisor assumes both RIA and broker roles, adds another layer of complexity. Payment structures become crucial indicators, with fiduciary advisors typically charging annual fees, eliminating the incentive to favor one product over another. In contrast, nonfiduciaries often rely on commissions per transaction, though exceptions exist.
Importantly, the article underscores that not everyone necessarily requires a fiduciary. Long-standing, trusting relationships between nonfiduciaries and clients may suit individuals with straightforward financial circ*mstances. Fiduciary advisors, with their annual percentage-based fees, are highlighted as a positive sign of an advisor's good intentions, but the article emphasizes the importance of assessing individual financial needs.
The historical context provided in the article outlines the evolution of fiduciary advisors, indicating that the prevalence of professionals prioritizing clients' interests is a relatively recent development, gaining momentum in the mid-1990s. Financial professionals transitioned from transaction-based models to fee-based, full-service advisory relationships, aligning with the fiduciary standard to establish long-term trust with clients.
In conclusion, the article navigates the complex landscape of fiduciary responsibilities, regulatory standards, and the evolving nature of financial advisory services, providing readers with valuable insights into the intricacies of this vital aspect of the financial industry.
