Summary/TL;DR
In the financial services industry, being a fiduciary means that you are legally obligated to act within your client’s best interests. Much weight is placed on this title, and many advisors even use it as their primary selling point. However, there are many different types of fiduciary standards, each of which can differ drastically from one another. Furthermore, there is nothing about this title that compels anyone to actually act within your best interest, just as there’s nothing about a law against stealing that prevents a thief from robbing you. Finally, the fact that an advisor will act in your best interest should be a given, not a key differentiator!
Introduction
A lot of noise is made about being a “fiduciary”, someone who is legally obligated to act in the best interest of their clients. In fact, one of the most common questions I receive from prospective clients is whether or not I’m a fiduciary (I am), and it will even serve as the centerpiece of many advisors’ advertising campaigns.
While I certainly don’t believe that being a fiduciary is bad, I believe that consumers are very mislead regarding the amount of weight they should put on this title when picking a financial advisor to work with. In this post, I’ll provide some much-needed context to the conversation.
The Types of Fiduciaries
First, there are at least four different “fiduciary standards” in financial services, one from the SEC, one from the DOL, one from the CFP Board, and a variety of voluntary standards that advisors agree to in order to be a part of certain professional organizations. The definitions that each of these entities offer for what constitutes fiduciary behavior can vary dramatically from one another, and you have no idea which standard one is referring to if they simply state that they are a fiduciary.
Furthermore, some of these standards don’t even limit advisor behavior, but only require that fees, commissions, conflicts of interest, etc, be disclosed! Imagine if a car salesman disclosed that he was going to earn $10,000 from selling you a certain vehicle, and then proceeded to tell you how great of a fit the car was for you. Wouldn’t you still be suspicious that he was leaving some things out given what he stands to gain? The fact that he’s disclosed his compensation doesn’t do anything to stop him from not telling you the whole story.
Too Much Trust Is Placed In The Fiduciary Title
Another thing to be mindful of is that there is no test, certification, or profession that forces someone to act within your best interest. Just because someone is legally a fiduciary, they are every bit as capable of ripping you off as a non-fiduciary. If anything, there is a risk of moral hazard that enters the picture with this title, as it allows people to believe they are being well-taken care of without feeling the need to check-up on their trusted “advisor”.
Furthermore, all financial professionals are liable for fraudulent or negligent advice they give to their clients, regardless of whether or not they are a considered a fiduciary. We already have laws that protect consumers from people who prioritize their commissions or bonus over their integrity, or who market products and services with inaccurate or carelessly presented information. Just because someone isn’t a fiduciary doesn’t mean these laws don’t apply to them.
While no fiduciary standard will limit the way that someone acts, they can limit the types of products and services that one can offer, and the types of compensation one can receive in return. This can be a useful filter, although it’s much easier to ask the advisor what their compensation structure is directly or read the “Fees and Compensation” section of their Form ADV Part 2 Brochure. And it still does not replace the responsibility you have to do your due diligence on them in other areas.
What’s So Special About That?
The final issue I have with people touting that they are a fiduciary as if it makes them a saint is that everyone, regardless of certifications, experience, or professional specialty, should be expected to act in their client’s best interest! It’s really a vacuous statement, like a home builder advertising that they build “the best” homes. DUH – every home builder believes they build the best homes. Show me what else you’ve got! It really begs the question – why would someone feel the need to tout something that should be expected of them to begin with? Perhaps they don’t have much else to offer…
An advisor should be able to tell you what is truly different about them that proves they are going to act and provide advice that is within your best interest. If they were really better than their competition, they would have no shortage of ways to demonstrate that to you by using their expertise and network to help you solve your problems and wouldn’t have to resort to relatively meaningless advertising.
Conclusion
I’ll conclude by reiterating that the point of this piece is not to say that being a fiduciary is a bad thing, that the fiduciary standard should go away, or that you shouldn’t work with someone who is a fiduciary. I don’t believe any of those things. My primary point has been that the fiduciary standard, on its own, is not a useful filter for choosing your financial advisor. And anyone who makes it their primary selling point is simply more likely to be lacking in other areas.
There are many other things about an advisor and their business that can tell you whether or not they’re the real deal, such as their compensation structure, areas of specialty, and the experience of their clients and other professionals that they work closely with.
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