How Can You Know if Your Financial Advisor is a Fiduciary?

What is a Fiduciary?

Do you know if your financial advisor is a fiduciary? Simply put, a fiduciary must put your interests ahead of his or her own. You might have assumed that your financial advisor or broker was always thinking of your interests only, but in fact, many people who use the name “advisor” face significant conflicts of interest such as commissions or referral fees that can cloud a financial advisor’s judgment. For clarity, we will restrict our use of the term “advisor” to only fee-based registered investment advisors for the rest of this discussion.

Fiduciary Rule

The US Department of Labor recently published its FAQs on its new “Fiduciary Rule” that has been the subject of much industry controversy and legal wrangling for years. This rule provides additional protections to 401K and IRA investors. While some feel the Trump administration could delay or even repeal the ruling, others believe it is likely to go into effect as planned on April 10, 2017. Prior to the rule, brokers only had to prove that an investment was “suitable” for someone based on income, experience, net worth, etc. Insurance professionals have faced even lower standards for recommending an annuity—which is one of the highest-commission products in their arsenal. On the other hand, Registered Investment Advisors (RIAs) have been legally required to operate under a fiduciary standard when advising their clients. (Most RIAs work for a fee rather than commissions, although some may operate both as financial advisors and brokers.)

A Financial Advisor’s Intentions

What are some examples of ways that your broker or insurance professional could be earning extra money by steering your investment decisions? The most obvious way is when they work on commission. Traditional brokers have historically worked for commission, meaning they only get paid when you transact. (This is not the case for “discount brokers” like Schwab or TD, however, who are generally paid a salary plus bonus.) Despite abundant literature detailing the benefits of a low turnover strategy, brokers tend to approach you with a new hot tip for you every few months. Know that in the background, the broker’s sales manager or firm may have instructed staff to push products that benefit the company’s—and the broker’s—bottom line.


Another notorious example of professionals selling products which don’t necessarily benefit you concerns the variable annuity. An annuity contract requires you to lock your money up in an often expensive, limited investment account that may earn the advisor large up-front or even “trailing” commissions. The annuity company must avoid losing the commission money it pays out to the salesperson, so it places a “surrender charge” on your money in case you take it out. These charges can remain in effect for a decade or more in some cases. In many instances, the annuity was recommended to someone who did not need the expensive insurance protection on the contributed assets.  


Less obvious examples of conflicts exist as well, however. When your RIA enthusiastically recommends that you move your 401K to an IRA, he could be doing so because he can now charge fees on the IRA assets. Or a broker representative could recommend “commission-free” funds that have something called a 12b1 fee. The 12b1 fee is an ongoing charge that the broker’s firm may receive from the mutual funds you hold. Over time, 12b1 fees can easily add up to much more than the commission costs you avoided. As one final example, a mutual fund company might have approached your broker or advisor about selling its funds. If there are any special benefits to the firm for recommending the funds, then there is yet another potential conflict in the advice you receive.

What To Expect

The new fiduciary rule levels the playing field when it comes to professionals advising on your retirement assets. Brokers, insurance salespeople, and RIAs must all now prove that they put your interests first when making recommendations for your IRAs, 401K, or other covered retirement accounts. Per the rule, this means you can expect the following from all the above-mentioned professionals:

  • Prudent advice informed by professional-level competence.
  • No more than reasonable compensation for services.
  • Clear disclosures about fees and conflicts of interest.

If you receive advice from someone who is not acting as an RIA, you will also receive a “best interest contract” whereby you give them explicit permission to receive additional compensation based on the advice.

When the new rules go into effect, you can expect any professional you use to exercise greater care when dealing with your retirement assets. However, remember that as of this writing, the new rule does not necessarily apply to your taxable accounts. So if you work with a professional financial advisor who, apart from the Fiduciary Rule, would otherwise be conflicted, the conflicts could still be driving recommendations on on-retirement assets. (Some pundits believe the rule will eventually extend to all accounts, but this is not certain to happen.)

The Department of Labor has recommended in its FAQs that you ask specific questions such as how your broker or advisor is compensated, whether he operates under a fiduciary standard, what assurances you will receive that a fiduciary standard is used in making recommendations, the existence of a written code of ethics, and how decisions about your assets get made. See the FAQ article appendix for the full list of questions, although note that brokers and advisors probably will not be able to provide customer references due to regulatory restrictions.


What to Look For in a Financial Advisor

Finally, it is always a good idea to look for fee-based financial advisors who hold the CFP® (Certified Financial Planner), CFA® (Chartered Financial Analyst), or CPA (Certified Public Accountant) designations, as these require the holders to comply with higher codes of ethics and standards of professional behavior than what the law strictly requires. There are so many advisors available that you can easily find someone who has achieved at least one of these designations.

Alpha Fiduciary: Financial Advisors You Can Trust

Alpha Fiduciary in Scottsdale works strictly as a fee-based financial advisor and does not receive additional compensation from commissions or special arrangements with fund companies. The firm employs several investment advisor professionals who hold the CFP or CFA® designations. We believe in applying a fiduciary standard to all recommendations regarding your retirement or taxable accounts. Our comprehensive approach considers your total financial situation so we can advise you with confidence. To learn more about our services, please fill out the contact form below.

About Alpha Fiduciary

We are driven by a desire to help our clients in as many aspects of their lives as possible, often extending beyond rates of return. Wealth management is more than handling your money. The dynamics of life influence your financial stability and can impact important decisions. We strive to understand the complexities of our clients’ lives so we can develop complete financial solutions that address them adequately. We are an advisory firm that helps you recognize, deal with, and solve life’s challenges through Total Wealth Management.