How to Tell If Your Advisor is a Fiduciary

You may have read recent news reports about a major rule finalized by the Department of Labor that requires financial advisors to uphold a fiduciary standard to their clients when discussing retirement, i.e. 401(k) and IRA accounts.  Many advisors are already held to this standard, but some, particularly advisors affiliated with stock brokerages, are not. The rule will change this, and it is estimated to save consumers some $17 billion by cutting down on unscrupulous financial advice in retirement accounts which leads to high fees. I believe it’s an excellent step in the right direction, and I’ll give you some details and examples of what all this means below. 

What’s a fiduciary?

I’ve been a fiduciary since the first day starting my company. What this means is that at no time will I ever put the interests of myself or another company above my clients’ interests. I’m a member of organizations such as the XY Planning Network and NAPFA, whose members hold themselves to a higher professional standard.

You should know the DOL is limited in its jurisdiction of enforcing this rule and non-retirement accounts aren’t currently covered at all. Thus, the best way to protect yourself is to dig deeper and ask your advisor directly if he/she is a fiduciary. They should be able to provide you with a fiduciary oath they’ve taken to act in good faith and in the best interests of you, the client.

Here’s my fiduciary oath to my clients

I believe in placing your best interests first. Therefore, I am proud to commit to the following five fiduciary principles:

1. I will always put your best interests first.
2. I will act with prudence; that is, with the skill, care, diligence, and good judgment of a professional.
3. I will not mislead you, and I will provide conspicuous, full and fair disclosure of all important facts.
4. I will avoid conflicts of interest.
5. I will fully disclose and fairly manage, in your favor, any unavoidable conflicts.

I also take the fiduciary oath a step further as it relates to conflicts of interest with fees. I do not accept any referral fees, commissions, or compensation contingent upon the purchase or sale of a financial product. 

Why does the fiduciary rule help consumers?

This rule is a good step forward and here’s some examples of why I think so.

Example 1: 401k Rollovers

One area where consumers haven’t always been given the best advice is why and when it’s a good idea to rollover your 401k money when you leave a job.  When you go to any brokerage website (i.e. Fidelity, Morgan Stanley), you’ll get the impression that a rollover to an IRA is always a great decision.  In fact, they often give you monetary incentives for rolling over your money.  Often, their hope is to sell you mutual funds that cost upward of 1.5-2% per year in fees. The truth is, rolling over to an IRA isn’t the best idea for everyone.

A true fiduciary will compare fees and investment options and look at your finances holistically before making a recommendation. As a fiduciary advisor I’ve done that kind of analysis all along and work to give you recommendations that makes sense for your unique financial situation. Because I receive a set fee for the advice I give, rather than commissions, I won’t profit from convincing you to use one option versus another. Non-fiduciary advisors walk a fine line and have incentives to recommend products or account types that earn them more in commissions.  

Example 2: High Fees in Retirement Accounts

Sometimes advisors offer proprietary products in retirement accounts. They sell them as unique, high value products, but often they come with very high sales charges and expense ratios attached. The person who sold them to you gets a cut of these fees, therefore they have incentives to continue recommending them even when the funds don’t perform as expected.  You won’t get an invoice or itemized receipt of these sales charges either; the fees are often hidden in prospectus documentation.  Often, the advisor doesn’t provide much in the way of financial advice other than what’s related to the investments in your account. 

A common buzzword here is “actively managed” mutual funds. These funds are supposed to perform better than basic benchmark indexes. It may sound good when you listen to the sales pitch, but you may not be getting a great deal. The S&P Indices Versus Active Fund report (SPIVA) shows that over the last 5 years 80% of active managers fail to outperform the S&P 500 index.  Thus, more often than not, you’re better off with a low cost index fund than a high-cost, actively-managed mutual fund.

True fiduciary advisors provide a much more holistic picture of your finances.  They take these kinds of fees into consideration before making recommendations and take the time and care to provide recommendations that make sense for you instead of merely increasing commissions.  The fiduciary rule will cut down on unfair practices in retirement accounts by requiring more disclosures, but the rule allows many brokers to continue recommending proprietary products in some cases. The best thing for you to do is be aware of what you’re paying for sales fees and expense ratios, and find out what value you get for those fees. If you can’t find this information on your own, ask for it directly.

What’s Next

This rule will be phased in for retirement accounts over the next few years, through 2019. If you are currently working with an advisor that is not a fiduciary, don’t expect changes overnight.  Existing investments are grandfathered under the rule.

As mentioned, the DOL only has authority over retirement accounts.  That means that those who work with major brokerage advisors will still be exposed to huge potential conflicts of interest for taxable (non-retirement) brokerage accounts, even once changes are phased in according to this rule.  The Securities and Exchange Commission has jurisdiction over other types of accounts and products and is working to finish a parallel rule, but it will take time. The SEC’s rule may also have different requirements than the DOL rule.   

Do you work with a full-time fiduciary?

As a consumer it can be difficult to tell from marketing information or an advisor’s website if he or she is, in fact a fiduciary at all times when they are working with you.  The best way to find out is to ask directly to see their fiduciary oath before you sign new paperwork. Mention this tip to friends and family so they can become aware of potential conflicts of interest too.

What else can you do to protect yourself?

This is a good time to do two other checks on your investment accounts:

• Conduct a broker check on your advisor to see if there have been any complaints or disciplinary actions, and to check their qualifications.

• Review the prospectus for each of your investments and write down the total expense ratio listed for each of the funds (Hint: it’s usually in a section called fees and expenses). Are you paying 1.5-2.0% or more for any of your funds in total annual expenses? If so, you may want to move the investments to lower cost index funds with expense ratios of less than 0.5%. Paying these high fees could be a sign you are working with an advisor who doesn’t have to uphold a true fiduciary standard. And you’re definitely overpaying if you’re not getting full financial planning services, as discussed in example 2 above.

Consumers often struggle with misinformation related to retirement advice, but the fiduciary rule will start the ball rolling to improve the quality of advice to consumers over the next few years. In addition to these tips for finding out whether your advisor is a fiduciary, what else do you plan to do to make sure you’re an informed consumer? 

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