Is Your Financial Advisor a Fiduciary?

“Show me the incentives and I will show you the outcome.” — Charlie Munger, Berkshire Hathaway

Of the roughly 310,000 financial advisors in America, how many do you think are required to act in their clients’ best interests? All of them? The vast majority?

Less than 10 percent of all financial advisors in the United States are required to follow the fiduciary standard — a standard legally requiring advisors to put your interests ahead of their own. Think about that: over 90 percent of advisors, the people millions of Americans trust to manage their entire life’s savings, are not legally required to do what’s in their clients’ best interests.

This may be a dry subject, but it’s critically important to understand the difference between a fiduciary and a non-fiduciary. Non-fiduciary professionals can recommend products that generate bonuses, prizes, and commissions for them, but may end up costing you significantly more in fees. It’s estimated that non-fiduciary advice costs investors up to $17 billion per year.

The Investment Advisers Act of 1940 was enacted to regulate advisors who give financial advice for compensation. Under today’s laws, only independent Registered Investment Advisers (RIAs) are required to act in a fiduciary capacity. Advisors working for broker-dealers — and those working for insurance companies — are held only to a suitability standard, which does not require putting clients’ best interests first, nor avoiding conflicts of interest.

When faced with two comparable investments, one with a higher commission, a fiduciary is legally unable to recommend the higher-cost investment because paying more in fees isn’t in the client’s best interest. An advisor held to the suitability standard could recommend the more expensive product, provided it’s “suitable.”

Most non-fiduciary advisors are good people, but their incentive system is often misaligned with a client’s best interest. The compensation structure of a broker is typically a tangled matrix that has nothing to do with client outcomes and everything to do with generating more revenue than last year. A 2018 Wall Street Journal report described how sales incentives created conflict between one major firm’s brokers and its clients — pushing clients into higher-fee products, mandating quotas for riskier alternative investments, and moving assets between products to generate bigger bonuses.

While most people aren’t receiving fiduciary advice, here’s what you can do to ensure you’re receiving advice aligned with your best interests:

Fortunately for consumers, an increasing number of advisors are leaving the brokerage world each year in favor of the independent, fiduciary model. Your financial advisor should have skin in the game and be a partner in your outcomes — they win when you win.