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“Find a financial advisor who is a fiduciary, someone legally bound to put your interests first.” I have made this recommendation many times over the years. Now, most financial advisors technically qualify as fiduciaries, which is a problem for consumers.
In its strict form, “fiduciary” describes a duty to act with care, skill, and prudence, entirely in your interest, free of conflicts such as earning a commission on what is sold to you.
Federal law holds that strict form over anyone managing corporate pension plans. Section 404(a) of the Employee Retirement Income Security Act requires that advisors to 401(k), 403(b), and other pension accounts must give advice completely in the interests of participants and beneficiaries. They cannot sell products to the plan for a commission, and they cannot engage in self-dealing.
For everyone outside a pension plan, the definition of “fiduciary” has become much less clear. Today the label covers most of the people giving financial advice. This includes those working under a registered investment adviser (RIA), whether they charge only fees or also collect commissions. Even many brokers who sell financial products on commission now operate under best-interest rules that look much like it, especially when the money in question is retirement savings. An advisor who takes no commission at all is a fiduciary, and the same term applies to one collecting a commission.
Consumer Challenges and Authority Bias
Suppose a new retiree rolls a lifetime of 401(k) savings into one account and asks an advisor what to do with it. The advisor recommends a variable annuity that pays a healthy commission, money that comes out of the nest egg through higher costs and surrender charges that lock the savings up for years. Nothing about the recommendation breaks a rule. The advisor is a fiduciary by every legal measure.
Titles that make a person sound competent and devoted to the client’s best interest tend to impress people. That tendency is authority bias, the inclination to defer to or not question someone simply because they hold a position of apparent expertise. Medicine’s version of this is called “white coat syndrome.” A consumer usually lacks the knowledge the professionals have, which of course is the reason for consulting them. Trusting your own gut and questioning an authority figure can engender fear, guilt, and shame, feeling like weakness or a lack of faith.
With no strict fiduciary standards set by Congress, parts of the financial profession have drawn a brighter line for themselves. I have belonged to the National Association of Personal Financial Advisors for almost twenty years. Its members are independent advisors who agree to work fee-only, accepting no commissions of any kind. This removes the conflict the fiduciary label no longer rules out.
The Commission Question
The word fiduciary no longer answers the only question that matters: Whether the advice you are given is shaped by what the advisor earns from giving it. Many advisors will tell you, accurately, that they are fiduciaries, and many will say they have no conflicts without disclosing the ones they hold. I find it frustrating that the burden falls on consumers, who are left to know the right questions to ask and the right way to ask them.
Now, if you would ask me how to find a financial advisor who will put your interests first, I would no longer suggest asking whether they are a fiduciary. Instead, ask – and ask for the answer in writing – this question: Do you or your company earn a commission on anything you recommend to me? The answer, or the refusal to give one, tells you whether you are sitting with an advisor or a salesperson wearing a professional title.
Read more by Rick Kahler:
Rick Kahler, MS, CFP®, CFT™, CeFT®, is the founder of Kahler Financial Group, a Rapid City, SD-based fee-only Registered Investment Advisor.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.