Does Your Financial Advisor Protect Your Interests?

Simply put, fiduciary financial advisors are expected to put their clients’ interests ahead of their own. The challenge is, who is and isn’t a fiduciary has sometimes confused small investors for many years. The rules are still evolving, but currently there are two main types of fiduciaries:

Registered investment advisors manage clients’ portfolios of investments over time for a fee that is typically a percentage of the invested assets. While some only earn this one fee – “fee-only advisors” – others also earn commissions from the sale of financial products. Investment advisors have had a longstanding duty to act as fiduciaries under the Investment Advisers Act of 1940.

Brokers typically sell investment products to clients for commissions. They have been required to adopt fiduciary principles only as of 2020 under the Securities and Exchange Commission’s (SEC’s) Regulation Best Interest, which is not considered as strict as the fiduciary rules for investment advisers.¹ Until 2020, brokers worked under a “suitability” standard, which only required that a recommended investment be reasonably suitable for a client.

The potential confusion for small investors stems from the question: What is motivating a financial advisor to do what they do? Is it your best interests? Or something else?

In other words, do your financial goals drive your financial advisor’s recommendations to move your money into and out of stocks and bonds – or mutual funds, exchange traded funds, annuities, or some other investment? And/or, if your advisor is earning commissions for selling you investment products, as many do, how big an influence do these incentives have on the recommendations you’re given?

This is where the word “fiduciary,” derived from the Latin word for “trust,” comes into play, because not all advisors are legally required to follow fiduciary standards. So, a debate over fiduciary standards has lasted for decades.

“Financial advisor” is an umbrella term, and most don’t fit neatly into one of those two fiduciary categories – investment advisor or broker. In fact, many finance professionals register as both, go by various titles including asset manager, investment counselor, wealth manager, and financial planner, and may provide additional services such as budget planning.

What’s more, you might have multiple retirement and brokerage accounts at a single firm, which may leave it up to you to determine which is advisory and which is not – in other words, which is held to the stricter fiduciary standards.

Fortunately, there are several ways individual investors can protect their best interests, from using the SEC’s “customer relationship summary” form, asking the right questions, and using online tools.

Carefully read Form CRS. The SEC’s 2020 fiduciary rules introduced a “customer relationship summary,” or Form CRS.² Investment advisors and brokers are now required to provide investors with this form, on which the SEC requires the following information:

• Types of services the firm offers.
• Fees, costs, conflicts of interest, and required standard of conduct associated with those services.
• Whether the firm and its professionals have ever been disciplined for past conduct.

Ask questions. The SEC has produced a list of questions you can ask your financial advisor to help clarify how well your interests are protected, including³:

• Should I choose an investment advisory service, a brokerage service, or both – and why?
• How do you choose the investments you recommend?
• What is your experience and education?
• How much of a $100,000 investment would go to fees and costs?
• How might your conflicts of interest affect me?
• Have you ever been disciplined for your conduct as a financial advisor?

Use online tools. Various regulators, professional associations, and advocacy groups have tools and standards to help protect investors’ interests. Here are some examples:

• An online tool to understand which licenses a financial advisor holds, as well as learn about their background, from the SEC.⁴
• A statement of standards of fiduciary duty, from the Investment Adviser Association.⁵
• A tool for comparing the cost of owning different mutual funds and other investment products, from the Financial Industry Regulatory Authority.⁶
• A one-page Fiduciary Oath that you can ask your financial advisor to sign, committing to principles such as full disclosure, from the Committee for the Fiduciary Standard.⁷
• An online financial advisor rating system, from a private research firm.⁸
• A tool for finding fee-only advisors, from the National Association of Personal Financial Advisors.⁹

Even as you research financial advisors, you can expect them to be asking a lot about you. According to the SEC, “to develop a reasonable understanding of a retail client’s objectives, an adviser should, at a minimum, make a reasonable inquiry into the client’s financial situation, level of financial sophistication, investment experience, and financial goals.”¹⁰

You might think that protecting your interests would be a financial advisor’s top priority, but legally that isn’t always the case. As fiduciary rules evolve, and with your life’s investments at stake, it’s a good idea to ask questions of your financial advisor to be clear about their role. This article provides information – and steps you can take – to help you understand your financial advisor’s requirements and make informed choices when you work with them.