Understanding Misleading Financial Advisor Titles – Your Right to Know
This past January, the Study on Investment Advisers and Broker-Dealers was released by the Securities and Exchange Commission (SEC). Among other issues, this 208-page document targeted the clear need for a uniform fiduciary standard that all advisors must adhere to. According to the study, “Retail customers should not have to parse through legal distinctions to determine whether the advice they receive is provided in accordance with their expectations or not.”
This report is a good first step in the right direction, but until real changes are made, which are most likely a long way down the road, investors still have to deal with the misleading titles that financial advisors are allowed to hide behind. Currently, all advisors do not adhere to a fiduciary standard. In fact, only a small percentage of those offering retirement planning, mutual fund information, and advising clients about investment choices are held to a fiduciary standard. What does this mean for the unwary investor? More often than not, the cloudy and confusing financial advisor titles lead clients to place their trust in an individual who has very different goals than the client. While the client’s goal may be to map out their best possible financial future, the non-fiduciary advisor (whose first commitment is to the broker-dealer they represent) is more interested in selling products that pull in a nice commission for themselves. This clear conflict of interest comes as a huge surprise to many investors who believe that all financial advisors play by the same rules.
Is it wrong that all advisors are not held to a fiduciary standard? Of course it, but now that you are aware of the problem, here’s how to protect yourself from financial salespeople hiding behind misleading titles.
The Two Vital Questions to Ask Your Financial Advisor
Before agreeing to work with any financial advisor, there are two preliminary questions to ask:
- How are you compensated?
- Whose interests are you required to put first? (or, Are you a fiduciary?) Be careful with this question. You’re not asking if they “believe” the customer’s interests should come first, you are asking if they hold the title of fiduciary. Hint: Most financial advisors, planners, and investment analysts are not fiduciaries.
If you can’t get past these two, there really isn’t any reason to discuss investment strategies, goals, risk tolerance or anything else. “You aren’t required to place my interests first? Ok, thank you…Goodbye.”
Here’s the breakdown of the two questions and what the answers reveal:
How is Your Financial Advisor Compensated?
It’s kind of a no-brainer to want to know how much you are paying for things, right? Whether it’s a dental bill, an insurance premium, or the check for dinner, the charges are clear and relatively simple to understand. Surprisingly, much of the financial services industry chooses to avoid full fee disclosure. Why? One can only assume that if charges are hidden, there’s a reason, and it isn’t good. One of the reasons financial advisors may choose to hide their fees is due to the fact that their clients may mistakenly believe the advice they are receiving is free. Alarming? Keep reading…
According to a survey conducted by Cerulli Associates research firm, 64% of investors involved in the study were not aware how their financial advisor was being compensated, and some even believed their financial advisor was providing services free of charge. Now keep in mind, this is not the general public; the survey was given to active investors
Most financial advisors are paid (by you) much more than you are aware of. How are they paid? Unless they are fee based only, your financial advisor is compensated by commission and bonuses directly tied to the financial products they are “advising” you to purchase. Could there be a conflict of interest here? You decide.
Keep in mind that most financial advisors are not fiduciaries and are not required to act in your best interest. Their real commitment is to the brokerage firm, not the clients.
What Are Your Financial Advisor’s Credentials?
Until the proposed changes take place, titles of financial advisors remain misleading. Registered Investment Advisors and Registered Fiduciary™ are two titles that can not be tacked onto the end of an advisor’s name at will. RIA’s and RF’s are fiduciaries, and are required by law to place the best interests of their clients ahead of their own.
On the other hand, financial advisors, wealth managers, senior financial planners, financial analysts, and investment managers are just a short list of titles that salespeople like to adopt, in an effort to steer clear of the “salesperson” stigma. Let’s face it, today’s brokers or financial salespeople are competing in a tough market and they are doing whatever they can, within the limits of the law, to build their client base. Unfortunately, the terms grossly represent who they actually are and ill-informed investors mistakenly believe that these salespeople do have a fiduciary duty.
Bottom line? Find out if your financial advisor is a Registered Fiduciary™ or a Registered Investment Advisor. If not, it may be time to look for a new advisor who is held to a fiduciary standard.
Fiduciary financial advisors are bound by five core fiduciary principles:
1. Put the best interest of the client first
2. Act with prudence—that is with the skill, care, diligence and good judgment of a professional
3. Do not mislead clients. Provide conspicuous, full and fair disclosure of all important facts
4. Avoid conflicts of interest
5. Fully disclose and fairly manage, in the client’s favor, unavoidable conflicts
Laying the Right Foundation
By choosing the right professional (with the right motives), you will be positioning yourself for success. On the other hand, relying on an individual with a misleading title who is not required to put your interests first really makes no sense at all.
For more information on fiduciary standards, see Protecting Yourself from Financial Salespeople. If you are currently working with a financial advisor, you have a right to full disclosure of fees. Print out our handy form and have your current advisor fill it out and sign: Full Disclosure and Transparency Fee Chart.
Remember, it’s your money and your financial future. Laying the right foundation begins with the right information.
Bryan Binkholder, The Financial Coach, is a registered investment advisor, radio personality, author and motivational speaker. He is best known for breaking through the confusion and exposing the misdeeds of the financial services industry and Wall Street. For more insights, financial tips and ways to protect your wealth, continue to follow Bryan’s blog. You’ll also want to take advantage of two popular resources: 7 Deadly Traps of Investing and The Six Pitfalls of Retirement Planning.
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