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The F word you need to know
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Last week during two separate new client meetings I was asked the same question: What is a fiduciary? I find the question particularly interesting because it mirrors a very significant debate taking place in Washington. First, the ambiguity of financial advice among the public and regulating bodies, and second, the lobbying from the broker-dealer industry to keep the word out of your vocabulary.

The point of contention centers on the word fiduciary. Fiduciary is derived from the Latin fidere, to trust. Trust is the pillar in an advisory relationship. If a fiduciary standard means "putting a client's interests above your own," who would argue about that? If you guessed Wall Street, you are right. Because so much media attention is given to the healthcare debate, most of us don't know about this David vs. Goliath battle taking place in the House Financial Services Committee.

Missed Regulations, Misconceptions and Misunderstandings

To understand this debate in Washington, we need to first set the stage on why the Obama Administration is proposing the Investor Protection Act of 2009. Thanks to the string of financial frauds and huge losses in the stock market, the public's trust in the financial system has eroded considerably. The proliferation of titles used by financial professionals has only added confusion. As a result, Congress is taking a long hard look at how financial advice is delivered, how the advice is regulated, and what, if any, standards should apply as part of the Investor Protection Act of 2009.

The financial services laws and regulations were mostly written during the Great Depression for two key areas: laws governing investment advice, which impose a fiduciary requirement on the adviser to act solely in the best interests of the client and laws governing the sale of financial products, which imposes a lower suitability standard. The patchwork of dated regulation has left gaps that allow anyone to call themselves a financial planner or advisor without appropriate competency and ethical standards. What about when the delivery of financial services involves a combination of various product sales and financial advice? This gray area allows someone to act as a fiduciary when presenting advice but become a salesperson when implementing that advice by selling products that could benefit the advisor rather than the client.

Federal and state law requires that Registered Investment Advisors are held to a Fiduciary Standard. This law requires that an advisor act solely in the best interest of the client, even if that interest is in conflict with the advisor's financial interest. Investment advisors must disclose any conflict, or potential conflict, to the client prior to and throughout a business engagement. Investment advisors must adopt a Code of Ethics and fully disclose how they are compensated. Following a fiduciary standard is not the norm, nor is it how you build sky scrapers or stadiums.

The majority of financial advisors are paid by commissions and don't adhere to a fiduciary standard. These other advisors often work for large financial services firms, known as Broker-Dealers. The loyalty of these advisors is to their employer, not their client because they are required by federal law to act in the best interest of their employer, not in the best interest of their clients.

One Question Feared Most by Many Financial Professionals

The most important question you can ask of anyone offering you financial advice is, "Do you have a legal fiduciary obligation to act in my best interests?" This draws the line in the sand that separates those who sit on your side of the table and have a legal obligation to act in your best interests and those who sit on the other side of the table and have no such obligation. The Merrill Lynch rule requires that your stockbroker disclose in writing: "Your account is a brokerage account and not an advisory account." And "Our interests may not always be the same as yours."

If this disclaimer appears in agreements you are signing, ask your advisor how he or she is compensated and where their loyalties lie. Then decide if the relationship is in your best interest. Don't be afraid to use the "F" word. It's a nine letter word that could spell the difference between your comfortable retirement... or your advisor's.

Andrew Brown is a Certified Financial Planner and a Fee-Only Registered Investment Advisor.