Is your financial advisor required to work in your best interest?



You may have noticed a couple places (like everywhere) on my website I use the word fiduciary. Fiduciary is a word that tends to make people feel good (for good reason) but it pays to really explore what it means, and the difference it can make to a family’s financial picture.

Fiduciary means that an advisor is legally required to act in your best interest, like a doctor or attorney. But what are the practical implications of this, and how does it compare to the other legal requirement found in the financial advising space?

Given the option between two choices; one that has greater benefit to the client, and one that has greater benefit to the advisor; a fiduciary must choose the option that benefits the client more than himself. If holding an investment vs. selling the investment to purchase another one is in the client’s best interest, the advisor must hold that investment.

Compare this to the other model most financial advisors work under, the “suitability standard.” The suitability standard only requires that the decision the advisor makes be suitable to meet the client’s goals, risk tolerance, and other considerations.

Pure, fee-only advisors are fiduciaries while “broker/dealers” are not and are only held to the suitability standard. Fiduciaries get paid a flat fee for managing your wealth, brokers get paid a commission for buying and selling securities (or are a hybrid, allowing them to talk about paying a fee and sweeping the commissions part under the rug). That’s great, but what does it mean and what difference does it make?
Substantial, big, large dollar differences.

If a fiduciary has a mutual fund from Big Fund Company A tied to the S&P500 in your account your portfolio value will fluctuate with that fund, and the advisor will be paid a fee from your account.
A broker may have bought you the same S&P 500 Mutual Fund from Big Fund Company A and made 3% from your total investment up front. If that broker sells that fund and buys a mutual fund to the S&P 500 from Big Fund Company B, which holds the exact same stocks, they will make a new 3% commission on the sale. This is called “churning.”

I asked a client once if he was with a fiduciary advisor or a broker and he had no idea (not a knock on him, I was a police officer, I couldn’t have told you a fiduciary vs focaccia cheese). I asked him “does your advisor call you once a year with a great new idea for “rebalancing” and sells a couple funds to buy new ones?” He said “yeah…. how did you know that?” Churning.

Now, am I saying your financial advisor is a bad guy? Not in the slightest! Most people in this industry are good people trying to help other people. They are just captive to their business model and their bosses who are on Wall Sreet. They have set up the system with an inherent conflict of interest.

Big Mutual Fund Company A,B,C…. have set up their funds to pay a commission to the broker, and then charge you high fees on top of that that they kick back to the bosses of the big box investment advisors for selling their product. Most captive brokers only have access to these funds. It’s not their fault.

The question for you, the reader, is this. Even if it is not their fault, is your financial wellbeing more important than that of your advisor and the Wall Street bosses who came up with this system? What if it cost you $100,000 of your own money to keep doing things the same old way?

In Tony Robins’ book Unshakable he notes that a Fidelity Investment Advisors study found only about 10% of financial advisors are pure, fee-only fiduciaries. I started Capital Partners Group with a business model that guarantees our fiduciary obligations. Our motivation is three-fold:

  • Charge a low, flat, easy to understand fee that is carved out of your financial pie.
  • Keep everyone else’s high fee products out of your portfolio.
  • Make you a bigger pie (and happy, relaxed, and stress free about your money)!

We only do better, when you do, and have no one to answer to but you. No revenue sharing, no commissions, and no kick backs for buying or selling any particular investments.

It never hurts to know your options, and no one says you have to have only one advisor. If you would like a no cost, no obligation, no pressure sit down to see if there is a better way for you and your family, all you have to do is pick up the phone and call.