In recent years, knowledge about fiduciary advisors has grown tremendously. But did you know that not all fiduciaries are created equal? Before hiring a financial advisor, be sure you understand the roles and regulations associated with different fiduciaries.
TrueNorth Wealth is a leading provider of wealth management and investment planning services. Based in Salt Lake City, UT, we pride ourselves in providing our clients with comprehensive investment strategies that cater to their needs and help them build a strong financial future.
What is a Fiduciary?
A fiduciary is someone who is obligated to put their client’s needs above their own. They have an ethical and legal duty to recommend investments and strategies that are in their clients’ best interest.
This is in direct contrast to the “suitability standard,” a lower standard for giving financial advice. The suitability standard states that an advisor or broker must provide investment advice that is “suitable” to the investor’s needs. This leaves room for an advisor to make recommendations that benefit themselves, even if those suggestions are not in the best interest of their clients.
In your search for a financial advisor, hiring a fiduciary should be non-negotiable. You want assurance that there are no conflicts of interest and that your financial needs are the top priority.
However, although the primary fiduciary duty is to put clients’ needs first, the standards, obligations, and regulations associated with being a fiduciary vary within each financial industry. Thus, it is critical to understand what someone means when they claim to be a “fiduciary.” Let’s break down the 4 different types.
SEC Fiduciaries
One common type of fiduciary is a registered investment advisor operating under the SEC (Security and Exchange Commission). These advisors primarily focus on investment advice, and their fiduciary standard is set by the Advisors Act of 1940.
This act implies that an investment advisor acts as a fiduciary by fully disclosing any and all fees, actions, and potential conflicts of interest when giving investment advice. However, it does not prohibit the advisor from engaging in conflicts of interest so long as they have been transparent about it. These types of fiduciaries could often be making a commission from their sales; you just have to read the fine print to find out.
DOL Fiduciaries
This type of fiduciary operates under the DOL fiduciary rule, which implies that advisors must act as a fiduciary when giving investment advice to a retirement investor. The DOL fiduciary standards prohibit any conflicts of interest that the SEC allows (if disclosed). For example, under DOL fiduciary rules, advisors cannot be compensated if that compensation would influence their investment advice.
But, although the DOL rules benefit the client by eliminating many conflicts of interest, their scope is still limited. Because the DOL fiduciary rules only apply to advisors giving advice to retirement investors, the same advisor who is a DOL fiduciary for your retirement account could potentially be non-fiduciary when giving you advice about your other accounts.
CFP Fiduciaries
According to the regulations set by the CFP Board, to be a fiduciary, Certified Financial Planners must disclose all conflicts of interest. This is more comprehensive than standards set by the SEC and the DOL. However, once all conflicts are disclosed, CFPs are deemed to be compliant regardless of how they steer clients.
These standards are also difficult to enforce; the CFP Board does not have the legal power to investigate or enforce legal action on a CFP who violates the fiduciary standard. Instead, consequences for violating the standard may include a public/private admonishment and/or a suspension or revocation of marks.
Voluntary Fiduciaries
These fiduciaries work with third-party organizations that require them to pledge to act as a fiduciary operating under a voluntary standard. Each organization regulates the fiduciary standard differently. Some may ban commissions, while others allow them. Some limit conflicts of interest, while others are more similar to the SEC in that they only require transparency. The highest standards can be found in some of these third-party organizations; however, these voluntary fiduciary standards are the least enforceable.
Some of the highest fiduciary standards in the industry are those bound to by members of NAPFA (National Association of Preferred Financial Advisors). If you are searching for a fiduciary advisor, NAPFA is a great place to start.
In a financial world where most people are just starting to understand the difference between fiduciary and suitability standards, grasping the different types of fiduciaries may seem daunting. Just remember this: various fiduciaries are held to different standards. When you hire a financial advisor, be sure to investigate the specific fiduciary obligations they are required to uphold.
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